40-F
CENOVUS ENERGY INC. (CVE)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 40-F
(Check one)
| REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934 |
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OR
| ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| For the fiscal year ended December 31, 2023 | Commission File Number 1-34513 |
| --- | --- |
| CENOVUS ENERGY INC. | |
| --- | |
| (Exact name of Registrant as specified in its charter) | |
| Not applicable | |
| (Translation of Registrant’s name into English (if applicable)) | |
| Canada | |
| (Province or other jurisdiction of incorporation or organization) | |
| 1311 | |
| (Primary Standard Industrial Classification Code Number (if applicable)) | |
| Not applicable | |
| (I.R.S. Employer Identification Number (if applicable)) | |
| 4100, 225 – 6 Avenue S.W.<br><br>Calgary, Alberta, Canada T2P 1N2<br><br>(403) 766-2000 | |
| (Address and telephone number of Registrant’s principal executive offices) | |
| CT Corporation System<br><br>28 Liberty Street<br><br>New York, NY 10005<br><br>(212) 894-8940 | |
| (Name, address (including zip code) and telephone number (including area code)<br>of agent for service in the United States) |
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Common shares, no par value (together with associated common share purchase rights) | CVE | New York Stock Exchange |
| Warrants (each warrant entitles the holder to purchase one common share at an exercise price of C$6.54 per share) | CVE WS | New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
| None |
|---|
| (Title of Class) |
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
| None |
|---|
| (Title of Class) |
For Annual Reports indicate by check mark the information filed with this Form:
| Annual information form | Audited annual financial statements |
|---|
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
1,871,868,729
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
| Yes ☐ No |
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| Yes ☐ No |
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act.
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
The annual report on Form 40-F 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. 333-275322), Form S-8 (File Nos. 333-163397 and 333-251886), Form F-3D (File No. 333-202165).
Principal Documents
The following documents, filed as Exhibits 99.1, 99.2, 99.3 and 99.4 to this annual report on Form 40-F, are hereby incorporated by reference in this annual report on Form 40-F:
(a)Annual Information Form of Cenovus Energy Inc. for the fiscal year ended December 31, 2023.
(b)Management’s Discussion and Analysis of Cenovus Energy Inc. for the fiscal year ended December 31, 2023.
(c)Consolidated Financial Statements of Cenovus Energy Inc. for the fiscal year ended December 31, 2023.
(d)Supplementary Information – Oil and Gas Activities (unaudited) for the fiscal year ended December 31, 2023.
ADDITIONAL DISCLOSURE
Certifications and Disclosure Regarding Controls and Procedures.
(a)Certifications. See Exhibits 99.5 99.6, 99.7 and 99.8 to this annual report on Form 40-F.
(b)Disclosure Controls and Procedures. As of the end of the Registrant’s fiscal year ended December 31, 2023, an evaluation of the effectiveness of the Registrant’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was carried out by the Registrant’s management with the participation of the principal executive officer and principal financial officer. Based upon that evaluation, the Registrant’s principal executive officer and principal financial officer have concluded that as of the end of that fiscal year, the Registrant’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Registrant in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “Commission”) rules and forms and (ii) accumulated and communicated to the Registrant’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
It should be noted that while the Registrant’s principal executive officer and principal financial officer believe that the Registrant’s disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the Registrant’s disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
(c)Management’s Annual Report on Internal Control Over Financial Reporting. The required disclosure is included in the “Report of Management” that accompanies the Registrant’s Consolidated Financial Statements for the fiscal year ended December 31, 2023, filed as Exhibit 99.3 to this annual report on Form 40-F.
(d)Attestation Report of the Registered Public Accounting Firm. The required disclosure is included in the “Report of Independent Registered Public Accounting Firm (PCAOB 271)” that accompanies the Registrant’s Consolidated Financial Statements for the fiscal year ended December 31, 2023, filed as Exhibit 99.3 to this annual report on Form 40-F.
(e)Changes in Internal Control Over Financial Reporting. During the fiscal year ended December 31, 2023, there was no change in the Registrant’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
Notices Pursuant to Regulation BTR.
None.
Audit Committee Financial Expert.
The Registrant’s board of directors has determined that Jane E. Kinney and Claude Mongeau, who are members of the Registrant’s audit committee, each qualify as an “audit committee financial expert” (as such term is defined in paragraph (8) of General Instruction B to Form 40-F), and that each of the following members of the Registrant’s audit committee is “independent” as that term is defined in the rules of the New York Stock Exchange: Jane E. Kinney, Richard J. Marcogliese, Claude Mongeau and Wayne E. Shaw.
Code of Ethics.
The Registrant has adopted a “code of ethics” (as that term is defined in paragraph (9) of General Instruction B to Form 40-F), entitled the “Code of Business Conduct & Ethics”, that applies to all of its employees, including its principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions.
The Code of Business Conduct & Ethics (the “Code”) is available for viewing on the Registrant’s website at www.cenovus.com and is available in print to any person without charge, upon request. Requests for copies of the Code should be made by contacting the Registrant’s Corporate Secretarial Department, Cenovus Energy Inc., 4100,225 - 6 Avenue S.W., P.O. Box 766, Calgary, Alberta, Canada T2P 0M2. Any amendments to the Code from time to time will be posted to the Registrant’s website within five business days of the amendment and will remain available for a twelve-month period. Information on or connected to our website, even if referred to herein, does not constitute part of this annual report on Form 40-F.
Since the adoption of the Code, there have not been any waivers, including implicit waivers, granted from any provision of the Code.
Principal Accountant Fees and Services.
The required disclosure is included under the heading “Audit Committee - External Auditor Service Fees” in the Registrant’s Annual Information Form for the fiscal year ended December 31, 2023, filed as Exhibit 99.1 to this annual report on Form 40-F.
Pre-Approval Policies and Procedures and Percentage of Services Approved by Audit Committee.
The required disclosure is included under the heading “Audit Committee - Pre-Approval Policies and Procedures” and “Audit Committee – External Auditor Service Fees” in the Registrant’s Annual Information Form for the fiscal year ended December 31, 2023, filed as Exhibit 99.1 to this annual report on Form 40-F. All fees have been pre-approved by the Audit Committee and therefore none of the services therein were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
Off-Balance Sheet Arrangements.
The Registrant does not have any commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons (which are not otherwise discussed in the Registrant's Management’s Discussion and Analysis for the fiscal year ended December 31, 2023, filed as Exhibit 99.2 to this annual report on Form 40-F), that have or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.
Disclosure of Contractual Obligations.
The required disclosure is included under the heading “Liquidity and Capital Resources - Contractual Obligations and Commitments” in the Registrant’s Management’s Discussion and Analysis for the fiscal year ended December 31, 2023, filed as Exhibit 99.2 to this annual report on Form 40-F.
Identification of the Audit Committee.
The Registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the audit committee are: Jane E. Kinney (Chair), Richard J. Marcogliese, Claude Mongeau and Wayne E. Shaw.
Mine Safety Disclosure.
Not applicable.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A.Undertaking
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.
B.Consent to Service of Process
(1)The Registrant has previously filed a Form F-X in connection with the class of securities in relation to which the obligation to file this report arises.
(2)Any change to the name or address of the agent for service of process of the Registrant shall be communicated promptly to the Commission by an amendment to the Form F-X referencing the file number of the Registrant.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.
| CENOVUS ENERGY INC. | |
|---|---|
| Date: February 15, 2024 | /s/ Karamjit S. Sandhar |
| Name: Karamjit S. Sandhar | |
| Title: Executive Vice-President &<br><br>Chief Financial Officer |
EXHIBIT INDEX
| Exhibits | Documents |
|---|---|
| 97 | Clawback Policy |
| 99.1 | Annual Information Form of Cenovus Energy Inc. for the fiscal year ended December 31, 2023. |
| 99.2 | Management’s Discussion and Analysis of Cenovus Energy Inc. for the fiscal year ended December 31, 2023. |
| 99.3 | Consolidated Annual Financial Statements of Cenovus Energy Inc. for the fiscal year ended December 31, 2023. |
| 99.4 | Supplementary Information – Oil and Gas Activities (unaudited) for the fiscal year ended December 31, 2023. |
| 99.5 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934. |
| 99.6 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934. |
| 99.7 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
| 99.8 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
| 99.9 | Consent of PricewaterhouseCoopers LLP. |
| 99.10 | Consent of McDaniel & Associates Consultants Ltd. |
| 99.11 | Consent of GLJ Ltd. |
| 101 | Interactive data file |
| 104 | Cover page interactive data file (formatted as Inline XBRL and contained in Exhibit 101) |
Document
Exhibit 97
Clawback Policy
Effective date: November 3, 2023
Last updated: November 1, 2023
Last reviewed: November 1, 2023
Purpose
This Clawback Policy (“Policy”) provides for the clawback of incentive-based compensation granted to Executive Officers of Cenovus Energy Inc. (the “Corporation”) in certain circumstances. Appendix A to this Policy is incorporated herein by reference and is intended to comply with the listing requirements of the New York Stock Exchange (“NYSE”) regarding clawback of incentive-based compensation pursuant to Rule 10D-1 under the U.S. Securities Exchange Act of 1934, as amended (the "U.S. Securities Exchange Act").
Definitions
“Board” means the board of directors of the Corporation;
“Executive Officer” means the Corporation’s current or former President, Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer (or if there is no such officer, then the Controller), any Vice-President of the Corporation in charge of a principal business unit, division or function, and any other current or former officer or person who performs or performed a significant policy-making function for the Corporation, including executive officers of Corporation subsidiaries;
“Incentive-Based Compensation” means, with respect to an Executive Officer, any annual incentive or other performance-based compensation awards (whether vested or not, paid or unpaid), including without limitation any cash bonus or equity incentive award under the Corporation’s short- and long-term incentive programs, plans and policies for eligible officers and employees of the Corporation (and any amounts attributable to such awards, including proceeds of sale);
“Repayment Amount” means the after-tax amount (as determined by the Board in its sole discretion): (a) in the case of 1 below, of Incentive-Based Compensation that was paid or granted to an Executive Officer in excess of the Incentive-Based Compensation that would have been paid or granted to that Executive Officer during the three fiscal years preceding such Restatement less Erroneously Awarded Compensation (as defined in Appendix A to this Policy) that is recovered by the Corporation in accordance with Appendix A to this Policy; or (b) in the case of 2 below, by which the Executive Officer was, directly or indirectly, financially enriched during the period of three years prior to the admission of the Executive Officer or the filing and service of a civil claim, statement of claim or equivalent commencement document, as applicable, in respect of any action of the Executive Officer; provided however that in no circumstances shall the Repayment Amount exceed the after-tax amount of such Incentive-Based Compensation originally paid or granted to the Executive Officer; and
“Securities Laws” means all applicable laws, regulations, rules, blanket rulings, orders, policies or instruments of any securities regulatory authority, securities commission, the Toronto Stock Exchange, the New York Stock Exchange or like body in Canada and/or the United States, as applicable from and after the date of this Policy.
Clawback
In addition, and without limitation, to recourse available to the Corporation pursuant to Appendix A to this Policy, in the event that:
- (a) any Incentive-Based Compensation paid or granted to an Executive Officer was calculated based upon, or contingent on, the achievement of certain financial results that were subsequently the subject of, or affected by, a Restatement (as defined in Appendix A to this Policy);
(b) the Executive Officer engaged in intentional misconduct or fraud that caused, or materially contributed to, the need for the Restatement, as admitted by the Executive
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Exhibit 97
Officer or, in the absence of such admission, as determined by a court of competent jurisdiction in a final judgement that cannot, or will not, be appealed; and
(c) the Incentive-Based Compensation paid or granted to, or that would have been received by, the Executive Officer would have been lower had the financial statements materially complied with Securities Laws; or
2. as admitted by the Executive Officer or, in the absence of such admission, as determined by a court of competent jurisdiction in a final judgement that cannot, or will not, be appealed, an Executive Officer has been financially enriched, directly or indirectly, as a result of the Executive Officer:
(a) engaging in fraud or theft of a financial nature; or
(b) failing to disclose a material conflict of interest;
that, in either case, has affected the business, reputation, operations or capital of the Corporation in a manner which has, directly or indirectly, resulted in a material decrease in the market price or value of securities of the Corporation;
(each, a “Triggering Event”),
the Board may, to the fullest extent permitted by applicable law and to the extent it determines that it is in the Corporation’s best interest to do so (in its sole discretion), require the Executive Officer to repay all or any portion of any Incentive Based Compensation paid or granted to the Executive Officer and/or cancel and terminate all or any portion of unvested Incentive-Based Compensation paid or granted to the Executive Officer.
Any Repayment Amount shall be paid, in cash, by the Executive Officer within 60 days (or another period as determined by the Board) of receipt by the Executive Officer from the Corporation of written notice requiring reimbursement of the Repayment Amount. To the extent that the Repayment Amount is not so paid to the Corporation, in addition to any other legal remedy that the Corporation may have, the Corporation may set off and deduct any Repayment Amount from and against any amounts that may be owing from time to time by the Corporation to the Executive Officer, including, without limitation, bonus, Incentive-Based Compensation, deferred compensation, and severance in a manner consistent with Section 409A of the Internal Revenue Code, if applicable, and, for greater certainty, the Corporation shall have the right to cancel any other outstanding Incentive-Based Compensation with a value equivalent to the outstanding Repayment Amount, as determined by the Board in its sole discretion. The determination of the Board with respect to the form(s) of recovery need not be uniform with respect to one or more Executive Officers.
For the avoidance of doubt, a restatement of the Corporation’s financial statements due to a change in accounting policies or principles shall not constitute a Triggering Event.
For the avoidance of doubt, this Policy applies to Incentive-Based Compensation received by the Executive Officer on or after January 1, 2022 (attributable to financial statements filed for the 2021 fiscal year and years following), except where an Executive Officer has an existing agreement with the Corporation that contains clawback provisions, in which case this Policy applies with immediate effect.
Further, each award agreement or any other document setting forth the terms and conditions of any annual incentive or other performance-based award granted to an Executive Officer shall be deemed to include the provisions of this Policy (including, for greater certainty, the provisions of Appendix A to this Policy).
Should there be any conflict between this Policy and the clawback provisions of any other agreement in place with the Executive Officer, the provisions of this Policy (including, for greater certainty, the provisions of Appendix A to this Policy) shall apply.
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Exhibit 97
The remedy specified in this Policy shall not be exclusive and shall be in addition to every other right or remedy at law or in equity that may be available to the Corporation. Without limiting the generality of this Policy and the provisions herein, measures for recovery of certain amounts of incentive-based compensation, as required under the NYSE listing standards, are set forth in Appendix A to this Policy.
The provisions of this Policy apply to the fullest extent of the law; provided however, to the extent that any provisions of this Policy are found to be unenforceable or invalid under any applicable law, such provision will be applied to the maximum extent permitted, and shall automatically be deemed amended in a manner consistent with its objectives to the extent necessary to conform to any limitations required under applicable law.
Board Discretion
Unless otherwise provided for in Appendix A to this Policy, the Board has the exclusive power and full and final authority to make all determinations deemed necessary or advisable for the administration of this Policy, including, without limitation, any determination as to whether the Policy applies, including:
•whether the non-compliance of the Corporation with any financial reporting requirement that results in a Restatement was material; and
•whether Incentive-Based Compensation paid or granted to the Executive Officer would have been lower had the financial statements materially complied with Securities Laws;
and if so, the Repayment Amount.
In determining whether to require repayment of the Repayment Amount and, if so, the Repayment Amount, the Board may take into account any considerations as it deems appropriate, including: (i) the likelihood of success in seeking repayment under applicable law relative to the effort involved; (ii) whether the assertion of a repayment claim may prejudice the interests of the Corporation in any related proceeding or investigation, or otherwise; (iii) whether the expense of seeking repayment is likely to exceed the amount sought or likely to be recovered; (iv) any pending or threatened legal proceedings relating to any acts or omissions giving rise, directly or indirectly, to the Restatement, and any actual or anticipated resolution (including any settlement) relating thereto; and (v) such other factors as it may deem appropriate under the circumstances.
Before the Board determines to seek repayment of the Repayment Amount, the Board may, in its sole discretion, provide to the applicable Executive Officer written notice of, and the opportunity to be heard at, a meeting of the Board (which may be in-person, by video conference, by means of telephone or other communication facility or by a combination of any of the foregoing, as determined by the Board in its sole discretion) held after a reasonable period of time.
In determining the after-tax portion of the Repayment Amount, the Board may take into account its good faith estimate of the tax paid or payable by such Executive Officer in respect of the Incentive-Based Compensation, as applicable, its good faith estimate of the value of any tax deduction or other tax relief available to such Executive Officer in respect of any repayment, in any of the forms sought, on account of the Repayment Amount, and such other factors as it may consider reasonable in the circumstances.
All such action, interpretations and determinations that are taken or made by the Board in good faith will be final, conclusive and binding. Subject to the Canada Business Corporations Act or any other legislation governing the Corporation and otherwise as provided for in Appendix A to this Policy, the Board may delegate to the Human Resources and Compensation Committee of the Board, on such terms as it considers appropriate, all or any part of the powers, duties and functions relating to the administration of this Policy.
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Exhibit 97
Appendix A – Clawback
This Appendix A to the Policy has been adopted in order to comply with the listing requirements of the New York Stock Exchange ("NYSE"), which were adopted pursuant to Rule 10D-1 of the United States Securities Exchange Act of 1934. This Appendix A shall apply to all Covered Compensation (as defined below) received on or after October 2, 2023. For the avoidance of doubt, recovery of any amount that may be recouped under the general provisions of the Policy to which this Appendix A is attached shall be in addition to and not in lieu of the recovery of Erroneously Awarded Compensation (as defined below) under this Appendix A.
Definitions
For the purposes of this Appendix A, the following terms shall have the meanings set forth below:
“Clawback Period” means the three completed fiscal years immediately preceding the earlier of (1) the date the Board (or a committee thereof) or the officer or officers of the Corporation authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that the Corporation is required to prepare a Restatement, or (2) the date that a court, regulator, or other legally authorized body directs the Corporation to prepare a Restatement. In addition, the Clawback Period includes any transition period (that results from a change in the Corporation’s fiscal year) within or immediately following those three completed fiscal years. However, a transition period between the last day of the Corporation’s previous fiscal year end and the first day of its new fiscal year that comprises a period of nine to twelve months would be deemed a completed fiscal year.
“Covered Compensation” means any compensation (including cash and equity compensation) that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure. For the avoidance of doubt, Covered Compensation does not include (1) base salary, (2) compensation awarded based solely on service to the Corporation (such as a time-vested awards of restricted share units (RSUs) and options), or (3) compensation awarded based solely on subjective standards, strategic measures (such as upon completion of a corporate transaction) or operational measures (such as attainment of a certain market share). To the extent an Executive Officer receives a salary increase earned wholly or in part on the attainment of a financial reporting measure performance goal, such salary increase will be subject to recovery under this Appendix A”.
“Erroneously Awarded Compensation” means the amount of Covered Compensation received by an Executive Officer that exceeds the amount of Covered Compensation that otherwise would have been received had it been determined based on the Restatement, which shall be calculated on a pre-tax basis.
“Financial reporting measure” means a measure that is determined and presented in accordance with the accounting principles used in preparing the Corporation’s financial statements, and any measures that are derived wholly or in part from such measures. For the avoidance of doubt, stock price and total shareholder return are financial reporting measures.
“Restatement” means any accounting restatement of the Corporation’s financial results due to material non-compliance of the Corporation with any financial reporting requirement under Securities Laws, including any required accounting restatement to correct a material error to previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
Recovery of Erroneously Awarded Compensation upon Restatement
Notwithstanding anything contained in the general Policy to which this Appendix A is attached, in the event that the Corporation is required to prepare a Restatement, then the Board shall require each Executive Officer to repay and/or forfeit the Erroneously Awarded Compensation received by such Executive Officer during the Clawback Period and shall promptly provide written notice to each
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Exhibit 97
Executive Officer containing the amount of the Erroneously Awarded Compensation received by such Executive Officer and a demand for repayment or return of such amount, as applicable. Covered Compensation shall be deemed “received” in the fiscal period during which the applicable financial reporting measure specified in the Covered Compensation award is attained, even if the payment or grant occurs after the end of that fiscal period. This Appendix A applies to all Covered Compensation received by a person (i) after beginning service as an Executive Officer (including Covered Compensation derived from an award authorized before the individual is newly hired as an Executive Officer, e.g. inducement grants), (ii) who served as an Executive Officer at any time during the performance period for that Covered Compensation, (iii) while the Corporation has a class of securities listed on a national securities exchange or a national securities association, and (iv) during the Clawback Period.
The Board shall have the discretion to cancel awards, withhold payments or take such other action as it deems appropriate to recoup all Erroneously Awarded Compensation from the Executive Officers. To the extent the Erroneously Awarded Compensation represents an award which has previously been deferred, such deferred compensation award shall be forfeited. Without otherwise limiting the Board’s authority to recover the Erroneously Awarded Compensation hereunder, the Corporation shall have the authority to unilaterally forfeit an Executive Officer’s deferred compensation, subject to compliance with Section 409A of the Internal Revenue Code, if applicable.
Where Covered Compensation is based only in part on the achievement of a financial reporting measure performance goal, the Corporation will determine the portion of the original Covered Compensation based on or derived from the financial reporting measure which was restated and will recalculate the affected portion based on the financial reporting measure as restated to determine the difference between the greater amount based on the original financial statements and the lesser amount that would have been received based on the Restatement. The Erroneously Awarded Compensation will be calculated on a pre-tax basis to ensure that the Corporation recovers the full amount of Covered Compensation that was erroneously awarded.
For Covered Compensation based on stock price or total shareholder return, where the amount of Erroneously Awarded Compensation is not subject to mathematical recalculation directly from the information in a Restatement: (a) the amount shall be based on a reasonable estimate of the effect of the accounting restatement on the stock price or total shareholder return upon which the Covered Compensation was received; and (b) the Corporation shall maintain and provide documentation of the determination of that reasonable estimate to the NYSE. Clawback of Erroneously Awarded Compensation shall be without regard to any fault, misconduct, responsibility or involvement of the Executive Officer in the material non-compliance of the Corporation with any financial reporting requirement under Securities Laws.
The Board will take such action as it deems appropriate, in its sole and absolute discretion, to reasonably promptly clawback the Erroneously Awarded Compensation, unless the Human Resources and Compensation Committee of the Board determines that it would be impracticable to recover such amount because (1) the direct costs of enforcing recovery would exceed the Erroneously Awarded Compensation amount to be recovered subsequent to making a reasonable and documented attempt at recovery; or (2) recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Corporation, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder, based on opinion of counsel; or (3) if the recovery of the Covered Compensation would violate the home-country laws of the Corporation based on an opinion of home country counsel, which opinion must be provided to the NYSE.
Additional Recovery upon restatements as a result of misconduct under SOX Section 304
In addition to the provisions in this Appendix A, if the Corporation is, as a result of misconduct, required to prepare a Restatement, then in accordance with Section 304 of the Sarbanes-Oxley Act of 2002 (“SOX”), the Board shall have the discretion to require the Chief Executive Officer and Chief Financial Officer (at the time the financial document embodying such financial reporting requirement was originally issued) to reimburse the Corporation for (1) any bonus or other incentive-based or equity-
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Exhibit 97
based compensation received from the Corporation during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of such financial document and (2) any profits realized from the sale of securities of the Corporation during that 12-month period. Such repayment shall be without regard to the knowledge, engagement or involvement of the Chief Executive Officer or Chief Financial Officer in the misconduct.
To the extent that the provisions of this Appendix A on Recovery of Erroneously Awarded Compensation upon Restatement (the “Rule 10D-1 Clawback Requirements”) provide for recovery of Covered Compensation recoverable by the Corporation pursuant to SOX and/or any other recovery obligations, the amount such Executive Officer has already reimbursed the Corporation shall be credited to the required recovery under the Rule 10D-1 Clawback Requirements.
General
The Corporation will not indemnify or provide insurance to cover any repayment of Covered Compensation in accordance with this Appendix A to the Policy.
This Appendix A is in addition to (and not in lieu of) any right of repayment, forfeiture or right of offset against any Executive Officer that is required pursuant to any other statutory repayment requirement, regardless of whether implemented at any time prior to or following the adoption of this Appendix A.
| INTERNAL USE ONLY<br><br>LAST UPDATED NOVEMBER 1, 2023 | CENOVUS ENERGY | Page 6 of #NUM_PAGES# |
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Document
Exhibit 99.1
Cenovus Energy Inc.
Annual Information Form
For the Year Ended December 31, 2023
February 14, 2024
(Canadian Dollars)
| Annual Information Form | |||
|---|---|---|---|
| For the year ended December 31, 2023 | TABLE OF CONTENTS | ||
| --- | CORPORATE STRUCTURE | 3 | |
| --- | --- | ||
| GENERAL DEVELOPMENT OF THE BUSINESS | 3 | ||
| DESCRIPTION OF THE BUSINESS | 7 | ||
| BUSINESS SEGMENTS | 7 | ||
| UPSTREAM | 9 | ||
| OIL SANDS | 9 | ||
| CONVENTIONAL | 10 | ||
| OFFSHORE | 10 | ||
| DOWNSTREAM | 12 | ||
| CANADIAN REFINING | 12 | ||
| U.S. REFINING | 13 | ||
| COMPETITIVE CONDITIONS | 15 | ||
| ENVIRONMENTAL PROTECTION | 15 | ||
| CODE OF BUSINESS CONDUCT AND ETHICS | 15 | ||
| EMPLOYEES | 16 | ||
| RISK FACTORS | 16 | ||
| RESERVES DATA AND OTHER OIL AND GAS INFORMATION | 16 | ||
| DISCLOSURE OF RESERVES DATA | 17 | ||
| DEVELOPMENT OF PROVED AND PROBABLE UNDEVELOPED RESERVES | 29 | ||
| SIGNIFICANT FACTORS OR UNCERTAINTIES AFFECTING RESERVES DATA | 29 | ||
| OTHER OIL AND GAS INFORMATION | 30 | ||
| DIVIDENDS | 38 | ||
| DESCRIPTION OF CAPITAL STRUCTURE | 38 | ||
| MARKET FOR SECURITIES | 42 | ||
| DIRECTORS AND EXECUTIVE OFFICERS | 45 | ||
| AUDIT COMMITTEE | 49 | ||
| LEGAL PROCEEDINGS AND REGULATORY ACTIONS | 50 | ||
| INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS | 51 | ||
| TRANSFER AGENTS AND REGISTRARS | 51 | ||
| MATERIAL CONTRACTS | 51 | ||
| INTERESTS OF EXPERTS | 53 | ||
| ADDITIONAL INFORMATION | 53 | ||
| ACCOUNTING MATTERS | 53 | ||
| ABBREVIATIONS AND CONVERSIONS | 54 | ||
| FORWARD-LOOKING INFORMATION | 54 | ||
| APPENDIX A — REPORT ON RESERVES DATA BY INDEPENDENT QUALIFIED RESERVES EVALUATORS | 57 | ||
| APPENDIX B — REPORT OF MANAGEMENT AND DIRECTORS ON RESERVES DATA AND OTHER INFORMATION | 58 | ||
| APPENDIX C — AUDIT COMMITTEE MANDATE | 59 |
In this Annual Information Form (“AIF”), dated February 14, 2024, unless otherwise specified or the context otherwise requires, includes references to “the Company”, “the Corporation”, “Cenovus”, “we”, “us”, or “our”, and means Cenovus Energy Inc., the subsidiaries of, joint arrangements, and partnership interests held directly or indirectly by, Cenovus Energy Inc. All of the information and statements contained in this AIF are made as of February 14, 2024. This AIF contains forward-looking information about our current expectations, estimates, projections and assumptions. See the Forward-looking Information section of this document for further information and the risk factors that could cause actual results to differ materially and the assumptions underlying our forward-looking information.
For a full discussion of the Company’s material risk factors, see the Risk Management and Risk Factors section in the Company’s 2023 Management’s Discussion and Analysis (“annual 2023 MD&A”), which section of the annual 2023 MD&A is incorporated by reference in this AIF and the risk factors described in other documents the Company files from time to time with securities regulatory authorities in Canada. Additional information about Cenovus, including our annual 2023 MD&A, annual reports and Form 40-F are available on SEDAR+ at sedarplus.ca, 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 or otherwise referred to in this AIF does not form part of this AIF unless expressly incorporated by reference herein.
| Cenovus Energy Inc. – 2023 Annual Information Form | 2 |
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| CORPORATE STRUCTURE | |
| --- |
Cenovus was formed under the Canada Business Corporations Act (“CBCA”) on November 30, 2009, pursuant to a plan of arrangement under the CBCA. 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”) under the Business Corporations Act (Alberta). In connection with the Arrangement, Cenovus amended its articles on December 30, 2020, to create eight series of cumulative redeemable preferred shares. On March 31, 2021, and December 30, 2021, Cenovus amalgamated with its wholly-owned subsidiaries, Husky and Husky Oil Operations Limited, respectively, by way of vertical short-form amalgamation.
The Company’s head and registered office is located at 4100, 225 – 6 Avenue S.W., Calgary, Alberta, Canada T2P 1N2.
Intercorporate Relationships
Cenovus’s material subsidiaries and partnerships as at December 31, 2023, are as follows:
| Percentage Owned (1) | Jurisdiction of Incorporation,<br><br>Continuance, Formation or<br><br>Organization | |
|---|---|---|
| FCCL Partnership (“FCCL”) | 100 | Alberta |
| Sunrise Oil Sands Partnership | 100 | Alberta |
| Husky Marketing and Supply Company | 100 | Delaware |
| Husky Energy Marketing Partnership | 100 | Alberta |
| Cenovus Energy Marketing Services Ltd. | 100 | Alberta |
| Husky Canadian Petroleum Marketing Partnership | 100 | Alberta |
| Husky Oil Limited Partnership | 100 | Alberta |
| Lima Refining Company | 100 | Delaware |
| Ohio Refining Company LLC (2) | 100 | Delaware |
| WRB Refining LP | 50 | Delaware |
(1)Reflects all voting securities of all subsidiaries and partnerships beneficially owned or controlled or directed, directly or indirectly, by Cenovus.
(2)Formerly known as BP-Husky Refining LLC. On February 28, 2023, Cenovus acquired the remaining 50 percent interest in BP-Husky Refining LLC from BP Products North America Inc. (“bp”).
The Company’s remaining subsidiaries and partnerships each account for (i) less than 10 percent of the Company’s consolidated assets as at December 31, 2023 and (ii) less than 10 percent of the Company’s consolidated revenues for the year ended December 31, 2023. In aggregate, Cenovus’s subsidiaries and partnerships not listed above did not exceed 20 percent of the Company’s total consolidated assets as at December 31, 2023 or total consolidated revenues for the year ended December 31, 2023.
| GENERAL DEVELOPMENT OF THE BUSINESS |
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Overview
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 (“NYSE”). Our cumulative redeemable preferred shares series 1, 2, 3, 5 and 7 are listed on the TSX. We are one of the largest Canadian-based crude oil and natural gas producers, with upstream operations in Canada and the Asia Pacific region, and one of the largest Canadian-based refiners and upgraders, with downstream operations in Canada and the United States (“U.S.”).
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, refine, transport and market crude oil, natural gas and refined petroleum products in Canada and internationally. Our physically and economically 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, natural gas and NGLs production through to the sale of finished products such as transportation fuels.
| Cenovus Energy Inc. – 2023 Annual Information Form | 3 |
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Three Year History
The following describes significant events and conditions that have influenced the development of Cenovus’s business during the last three financial years:
2021
•Cenovus and Husky combine. On January 1, 2021, Cenovus and Husky closed an all-stock transaction to combine the two companies. As a result of completing the Arrangement, Husky became a wholly-owned subsidiary of Cenovus. Husky common shareholders received 0.7845 of a Cenovus common share and 0.0651 of a Cenovus Warrant, in exchange for each Husky common share. This resulted in the issuance of 788.5 million common shares and 65.4 million Cenovus Warrants. In addition, Husky preferred shareholders exchanged each Husky preferred share for one Cenovus preferred share with substantially identical terms.
•Disposition of assets. The Company completed several transactions to adjust its portfolio.
◦Marten Hills gross overriding royalty interest (“GORR”). On May 18, 2021, Cenovus closed the sale of its GORR interest in the Marten Hills area of Alberta for gross proceeds of $102 million.
◦East Clearwater and Kaybob asset sales. Cenovus closed the sale of Conventional assets in the Kaybob area in July 2021 and in the East Clearwater area in August 2021 for combined gross proceeds of $82 million.
◦Headwater share sale. On October 14, 2021, Cenovus sold its 50 million common shares of Headwater Exploration Inc. (“Headwater”) for gross proceeds of $228 million. On December 23, 2021, Cenovus exercised its 15 million Headwater common share purchase warrants for $30 million. On June 8, 2022, Cenovus sold its 15 million common shares of Headwater for gross proceeds of $110 million.
◦Wembley asset sale. On November 30, 2021, Cenovus announced an agreement to sell the majority of its Montney assets in Wembley for cash proceeds of approximately $238 million. The sale closed on February 28, 2022.
◦Husky retail fuels network sale. On November 30, 2021, Cenovus announced agreements to sell 337 gas stations for aggregate cash proceeds of approximately $420 million. Cenovus retained its commercial fuels business, which includes approximately 170 cardlock, bulk plant and travel centre locations. The sales closed on September 13, 2022.
◦Tucker asset sale. On December 16, 2021, Cenovus announced an agreement to sell its Tucker asset for gross cash proceeds of $800 million. The sale closed on January 31, 2022.
◦Atlantic restructuring. Cenovus announced an agreement with its partners to restructure its working interests in the Atlantic region.
◦Terra Nova restructuring. On September 8, 2021, Cenovus’s working interest increased to 34 percent from 13 percent. The Company received $78 million, before closing adjustments, from exiting partners as a contribution towards future decommissioning liabilities related to the field. In addition, the Terra Nova Asset Life Extension project received approval to proceed.
◦White Rose restructuring. In the third quarter of 2021, Cenovus entered into an agreement with Suncor Energy Inc. (“Suncor”) to decrease our working interest in the White Rose field and satellite extensions, pending the continuation of the West White Rose project. Cenovus would reduce its working interest in the original field from 72.5 percent to 60.0 percent and in the satellite extensions from 68.875 percent to 56.375 percent. On May 31, 2022, Cenovus and its partners announced it reached an agreement to restart the West White Rose project.
•Oil Sands Pathways to Net Zero initiative. On June 9, 2021, Cenovus announced the Oil Sands Pathways to Net Zero initiative (“Pathways Alliance”), an alliance of peers working collectively with governments with a goal to achieve net zero GHG from oil sands operations by 2050.
•Credit facility consolidation and reduction. On August 18, 2021, $8.5 billion of committed credit facilities, including those assumed in the Arrangement, were cancelled and replaced with a $6.0 billion committed revolving credit facility. As at December 31, 2021, the committed revolving credit facility consisted of a $2.0 billion tranche maturing on August 18, 2024, and a $4.0 billion tranche maturing on August 18, 2025.
•Senior notes offering. On September 13, 2021, Cenovus issued US$500 million of 2.65 percent senior unsecured notes due 2032 and US$750 million of 3.75 percent senior unsecured notes due 2052. Proceeds from the offering were used for debt reduction.
•Debt reduction. In 2021, Cenovus repurchased a principal amount of US$2.2 billion unsecured notes through a series of tender offers and redemptions under the indentures governing certain notes.
| Cenovus Energy Inc. – 2023 Annual Information Form | 4 |
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•Reinstated and increased dividend. In the first quarter, Cenovus reinstated its common share dividend and in November, the Company doubled its dividend to $0.035 per common share for the fourth quarter of 2021.
•Normal Course Issuer Bid (“NCIB”). On November 4, 2021, Cenovus announced that the TSX accepted the Company’s notice of intention to implement a NCIB to purchase for cancellation up to 146.5 million of the Company’s common shares. In 2021, Cenovus purchased 17.0 million common shares for $265 million.
2022
•Acquisitions.
◦Sunrise. On August 31, 2022, Cenovus closed the acquisition of the remaining 50 percent interest in Sunrise (the “Sunrise Acquisition”) with BP Canada Energy Group ULC (“bp Canada”) for net proceeds of $394 million, a variable payment with a maximum cumulative value of $600 million expiring in eight quarters subsequent to August 31, 2022 and Cenovus’s 35 percent interest in the undeveloped Bay du Nord project offshore Newfoundland and Labrador.
◦Toledo Refinery. On August 8, 2022, Cenovus announced an agreement to purchase the remaining 50 percent interest in the Toledo Refinery (the “Toledo Acquisition”) from bp.
•Achieved first oil at Spruce Lake North. Spruce Lake North thermal plant achieved first oil in the third quarter of 2022.
•Commenced commissioning of the Superior Refinery. In December 2022, commissioning for the restart of the Superior Refinery commenced and progressed into the first quarter of 2023. The refinery was taken out of operation in 2018 following an explosion and fire. The restart of the refinery will increase total crude oil processing capacity by 49.0 thousand barrels per day.
•Received regulatory approval. In December 2022, Cenovus received regulatory approval to develop the Ipiatik asset in the Foster Creek area.
•Divestitures.
◦Tucker asset sale. On January 31, 2022, Cenovus sold its Tucker asset in the Oil Sands segment for net proceeds of $730 million.
◦Wembley asset sale. On February 28, 2022, Cenovus sold its Wembley assets in the Conventional segment for net proceeds of $221 million.
◦Restart of West White Rose project. On May 31, 2022, Cenovus and its partners reached an agreement to restart the West White Rose project in the Atlantic region offshore Newfoundland and Labrador. Cenovus transferred 12.5 percent of its working interest in the White Rose field and satellite extensions to Suncor.
◦Headwater share sale. On June 8, 2022, Cenovus sold its investment in Headwater for proceeds of $110 million.
◦Retail fuels network sale. On September 13, 2022, Cenovus closed the sale of 337 gas stations within its retail fuels network for net cash proceeds of $404 million.
•Partial suspension of the crude oil price risk management program. On April 4, 2022, Cenovus announced the suspension of its crude oil price risk management activities related to WTI. Given the strength of its balance sheet and liquidity, the Company determined these programs were no longer required to support financial resilience.
•First Nations Major Projects Coalition (“FNMPC”). On September 29, 2022, Cenovus joined the FNMPC’s Sustaining Partners Program. This partnership aims to advance FNMPC’s strategies that promote Indigenous inclusion in major developments and articulate Indigenous perspectives concerning environmental, social and governance (“ESG”) investment standards and sustainable business practices.
•Debt reduction. In 2022, Cenovus repurchased principal amounts of US$2.6 billion unsecured notes due between 2023 and 2043, and $750 million unsecured notes due in 2025.
•Increased base dividend. On April 26, 2022, Cenovus tripled the base dividend per common share from $0.035 to $0.105, or $0.42 annually, starting in the second quarter of 2022.
•Updated plan for increased shareholder returns. On April 27, 2022, Cenovus announced a revised capital allocation framework to return incremental cash to shareholders through continued share repurchases and/or the use of a variable dividend mechanism. Shareholder returns are dependent on reaching certain net debt targets and the amount of excess free funds flow.
•Variable dividend. In addition to the Company’s base dividend, Cenovus’s Board of Directors (the “Board”) declared a variable dividend of $0.114 per common share. The variable dividend was paid on December 2, 2022.
| Cenovus Energy Inc. – 2023 Annual Information Form | 5 |
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•Renewal of NCIB. On November 7, 2022, the Company received approval from the TSX to renew the Company’s NCIB program to purchase up to 136.7 million common shares during the period from November 9, 2022, to November 8, 2023. For the year ended December 31, 2022, the Company purchased and cancelled 112.5 million common shares.
2023
•Jonathan M. McKenzie appointed President & Chief Executive Officer and elected as Director. Effective April 26, 2023, Jonathan M. McKenzie became Cenovus’s President & Chief Executive Officer and was elected as a Director. On the same date, Alexander J. Pourbaix was appointed as Executive Chair of the Board and Claude Mongeau was appointed Lead Independent Director.
•Toledo Refinery acquisition. On February 28, 2023, Cenovus closed the Toledo Acquisition for net proceeds of US$378 million (C$514 million), providing Cenovus with full ownership and operatorship of the refinery and further integrating Cenovus’s heavy oil production and refining capabilities.
•Increased base dividend. On April 26, 2023, Cenovus increased the Company’s base dividend per common share from $0.105 to $0.140, or $0.56 annually, starting in the second quarter of 2023.
•Safe restart of the Toledo and Superior refineries. Following an incident in September 2022 at the Toledo Refinery which resulted in a temporary shut down, it was safely returned to full operations in June 2023. At the Superior Refinery, the Company safely made significant progress towards a return to full operations. The Company introduced crude oil in mid-March and safely restarted the fluid catalytic cracking unit (“FCCU”) in early October.
•Warrant purchase. On June 14, 2023, Cenovus purchased and cancelled 45.5 million of the Cenovus Warrants, for a total of $711 million. The purchased warrants were paid in full by December 31, 2023.
•Debt reduction. In 2023, Cenovus purchased US$1.0 billion in principal of certain unsecured notes due between 2029 and 2047.
•Renewal of NCIB. On November 7, 2023, the Company received approval from the TSX to renew the Company’s NCIB program to purchase up to 133.2 million common shares from November 9, 2023, to November 8, 2024. For the year ended December 31, 2023, the Company purchased and cancelled 43.6 million common shares. From January 1, 2024, to February 12, 2024, the Company purchased an additional 4.3 million common shares.
| Cenovus Energy Inc. – 2023 Annual Information Form | 6 |
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| DESCRIPTION OF THE BUSINESS | |
| --- |
BUSINESS SEGMENTS
As at December 31, 2023, the Company’s reportable segments were as follows:
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, 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. These provide 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 Husky-CNOOC Madura Ltd. (“HCML”), which is engaged in the exploration for and production of NGLs and natural gas in offshore Indonesia.
| Cenovus Energy Inc. – 2023 Annual Information Form | 7 |
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Downstream Segments
•Canadian Refining, includes the owned and operated Lloydminster upgrading and asphalt refining complex, which converts heavy oil and bitumen into synthetic crude oil, diesel, asphalt and other ancillary products. Cenovus also owns and operates the Bruderheim crude-by-rail terminal and two ethanol plants. The Company’s commercial fuels business across Canada is included in this segment. Cenovus markets its production and third-party commodity trading volumes in an effort to use its integrated network of assets to maximize value.
•U.S. Refining, includes the refining of crude oil to produce gasoline, diesel, jet fuel, asphalt and other products at the wholly-owned Lima, Superior and Toledo refineries, and the jointly-owned Wood River and Borger refineries (jointly owned with operator Phillips 66). Cenovus markets some of its own and third-party refined products including gasoline, diesel, jet fuel and asphalt.
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 feedstock and internal usage of crude oil, natural gas, condensate, other NGLs and refined products between segments; transloading services provided to the Oil Sands segment by the Company’s crude-by-rail terminal; the sale of condensate extracted from blended crude oil production in the Canadian Refining segment and sold to the Oil Sands segment; and unrealized profits in inventory. Eliminations are recorded based on market prices.
For the year ended December 31, 2023, consolidated revenues were $52.2 billion (2022 – $66.9 billion). The following table summarizes products with revenues that exceeded 15 percent of consolidated revenues.
| 2023 | 2022 | |||
|---|---|---|---|---|
| Revenue<br><br>($ millions) | Percent of Consolidated Revenues<br><br>(percent) | Revenue<br><br>($ millions) | Percent of Consolidated Revenues<br><br>(percent) | |
| Crude Oil (1) (2) | 23,524 | 45 | 29,931 | 45 |
| Gasoline (3) | 12,897 | 25 | 15,064 | 23 |
| Distillates (3) (4) | 11,364 | 22 | 13,617 | 20 |
(1)Comparative periods reflect certain revisions. See Note 39 of Cenovus’s consolidated financial statements for the year ended December 31, 2023, and Prior Period Revisions found in the Advisory section of the annual 2023 MD&A for further details.
(2)Prior period results were re-presented to correct the classification of third-party condensate sales between crude oil and NGLs.
(3)Comparative periods were re-presented to include gasoline and distillates from the Canadian Refining segment that were previously excluded.
(4)Includes diesel and jet fuel.
Principal markets for Cenovus’s crude oil production from the Oil Sands and Conventional segments includes its refining operations in Lloydminster, Alberta and Saskatchewan; Toledo and Lima in Ohio; and Superior, Wisconsin, in addition to the U.S. Gulf Coast (“USGC”) and PADD II markets for the Company’s production volumes exported to the U.S. and the Hardisty and Edmonton terminals in Alberta. The Company’s distillates and gasoline production is largely produced in its U.S. Refining segment and principal markets include the Ohio Valley and the Upper Midwest.
Crude oil production from Cenovus’s Oil Sands and Conventional segments is distributed through long-term contracts on third-party pipelines to its refinery operations in Lloydminster, through the Edmonton, Hardisty and PADD II terminals for distribution to its U.S. refineries and the USGC via the Keystone, Enbridge and other pipelines. See the U.S. Refining sections below for details on the distribution of the Company’s distillates and gasoline production.
Physical and Economic Integration
Cenovus’s integrated upstream and downstream operations help to mitigate the impact of volatility in light-heavy crude oil differentials and contribute to the Company’s net earnings by capturing value from crude oil, natural gas and NGLs production through to the sale of finished products such as transportation fuels.
Bitumen production at the Company’s Oil Sands assets is blended with condensate and butane and used as crude oil feedstock by Cenovus’s downstream operations. In addition, condensate is extracted from the blended crude oil in the Company’s Canadian Refining segment and sold back to the Oil Sands operations. Cenovus’s U.S. Refining operations has the capability to process heavy crude oil from its Oil Sands segment and Husky Synthetic Blend (“HSB”) produced at the Lloydminster Upgrader.
| Cenovus Energy Inc. – 2023 Annual Information Form | 8 |
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UPSTREAM
Oil Sands
As of December 31, 2023, Cenovus held bitumen and heavy oil rights of approximately 1.5 million gross acres (1.5 million net acres) within the Athabasca and Cold Lake regions of northern Alberta and Saskatchewan, as well as the exclusive rights to lease an additional 603 thousand gross acres on the Cold Lake Air Weapons Range, an active military base.
Development Approach
Cenovus uses steam-assisted gravity drainage (“SAGD”) technology to recover bitumen. The Company does not employ mining techniques for extraction and none of its bitumen reserves are suitable for extraction using mining techniques. SAGD involves injecting steam into the reservoir to enable bitumen to be pumped to the surface.
At Cenovus’s Lloydminster conventional heavy oil assets, the Company employs a combination of production techniques including cold heavy oil production with sand (“CHOPS”), horizontal and multilateral wells and enhanced oil recovery (“EOR”). EOR is defined as the increased recovery from a crude oil pool achieved by artificial means or by the application of energy extrinsic to the pool.
Foster Creek
Cenovus has a 100 percent working interest in Foster Creek, located on the Cold Lake Air Weapons Range, which is 72 kilometres northwest of Cold Lake, Alberta. Foster Creek produces from the McMurray formation, with a reservoir depth of up to 550 metres, using SAGD technology.
Bitumen production at Foster Creek averaged 186.3 thousand barrels per day in 2023 (2022 – 191.0 thousand barrels per day).
Cenovus operates a 100-megawatt natural gas-fired cogeneration facility at Foster Creek. The steam and power generated by the facility is used within the SAGD operation and any excess power generated is sold into the Alberta power pool.
Christina Lake
Cenovus has a 100 percent working interest in Christina Lake, which is located approximately 150 kilometres southeast of Fort McMurray, Alberta. Christina Lake produces from the McMurray formation, with a reservoir depth of up to 430 metres, using SAGD technology.
Bitumen production at Christina Lake averaged 237.4 thousand barrels per day in 2023 (2022 – 246.5 thousand barrels per day).
Cenovus operates a 100-megawatt natural gas-fired cogeneration facility at Christina Lake. The steam and power generated by the facility is used within the SAGD operation and any excess power generated is sold into the Alberta power pool.
Cenovus has a 100 percent working interest in Narrows Lake, which is located adjacent to Christina Lake and has a reservoir depth of up to 400 metres. The expansion of the Christina Lake development area to include Narrows Lake will provide future sustaining pad locations for feedstock into the Christina Lake plant. First steam from Narrows Lake is expected in 2025.
Sunrise
Cenovus has a 100 percent working interest in Sunrise, located approximately 60 kilometres northeast of Fort McMurray, Alberta. Sunrise produces from the McMurray formation, with a reservoir depth of up to 250 metres, using SAGD technology.
Bitumen production at Sunrise averaged 48.9 thousand barrels per day in 2023 (2022 – 31.3 thousand barrels per day).
Lloydminster Thermal
Lloydminster thermal consists of 12 producing thermal plants, which are 100 percent owned by Cenovus and produce bitumen. The plants are located in the Lloydminster region of Saskatchewan. Each plant has a number of production pads and uses SAGD technology.
Bitumen production at Lloydminster thermal averaged 104.1 thousand barrels per day in 2023 (2022 – 99.9 thousand barrels per day).
Lloydminster Conventional Heavy Oil
Lloydminster conventional heavy oil uses a combination of production techniques including CHOPS, horizontal and multilateral wells and EOR in the Lloydminster region of Alberta and Saskatchewan.
Heavy oil production averaged 16.7 thousand barrels per day in 2023 (2022 – 16.3 thousand barrels per day) and conventional natural gas production averaged 9.6 MMcf per day in 2023 (2022 – 9.9 MMcf per day).
| Cenovus Energy Inc. – 2023 Annual Information Form | 9 |
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Husky Midstream Limited Partnership (“HMLP”)
The Company jointly owns and is the operator of 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 Limited holding a 49 percent interest and CK Infrastructure Holdings Limited holding a 16 percent interest. HMLP has its own board of directors and independent financing that supports both growth projects under construction and planned future expansions.
HMLP has approximately 2,300 kilometres of pipeline in the Lloydminster region and 5.9 million barrels of storage capacity at Hardisty and Lloydminster. The assets play an integral role in the transportation of heavy oil production to end markets by providing connections to the Lloydminster Upgrader and the Lloydminster Refinery, third-party terminals and pipelines through the Hardisty terminal.
The Lloydminster terminal, with a total storage capacity of 1.0 million barrels, serves as a hub for the gathering systems. The pipeline systems transport blended heavy crude oil to the Lloydminster terminal for delivery to the Company’s Lloydminster Upgrader and Lloydminster Refinery. Blended heavy crude oil from the field and synthetic crude oil from the upgrading operations are transported south to Hardisty, Alberta to a connection with the major third-party owned export pipelines.
The Hardisty terminal, with a total storage capacity of 4.9 million barrels, acts as the exclusive blending hub for WCS, the largest heavy oil benchmark pricing point in North America.
In addition, HMLP owns and Cenovus operates the Ansell Corser gas processing plant located in west-central Alberta. The gas processing plant has a capacity of 120 MMcf per day and supports our Conventional segment.
Conventional
Cenovus’s Conventional assets include approximately 6.4 million net acres in Alberta and British Columbia with an average working interest of 83 percent. Operating areas included Elmworth-Wapiti, Kaybob-Edson, Clearwater and Rainbow Lake with reservoir depths ranging from 1,000 to 3,200 metres targeting formations within the Cretaceous, Jurassic, Triassic and Devonian geological periods focused primarily on the Cardium and Spirit River. Horizontal drilling is primarily used to unlock the vast resource potential in these areas. Cenovus has processing capacity through various operated and non-operated natural gas facilities, in addition to a 50 percent working interest in a 90-megawatt natural-gas fired cogeneration facility along with multiple field facilities, compressor stations and pipelines.
In 2023, the Company’s net production from the Conventional assets averaged 5.9 thousand barrels per day of light crude oil, 21.7 thousand barrels per day of NGLs, and 554.1 MMcf per day of conventional natural gas (2022 – 7.5 thousand barrels per day, 23.8 thousand barrels per day and 576.1 MMcf per day, respectively).
Offshore
Asia Pacific
China
Liwan Gas Project
The Liwan Gas Project is a deepwater gas project offshore China located approximately 300 kilometres southeast of the Hong Kong Special Administrative Region. The Liwan Gas Project includes the natural gas discoveries at the Liwan 3-1, Liuhua 34-2 and Liuhua 29-1 fields within the Contract Area 29/26 located in the Pearl River Mouth Basin of the South China Sea. Cenovus has a 49 percent working interest in the Liwan 3-1 and Liuhua 34-2 fields as well as a 75 percent working interest in the Liuhua 29-1 field. The remaining working interest is owned by China National Offshore Oil Corporation (“CNOOC”) through subsidiaries.
The Liwan 3-1, Liuhua 34-2 and Liuhua 29-1 fields share a subsea production system, subsea pipeline transportation and onshore gas processing infrastructure. Cenovus is the operator of the deepwater infrastructure and CNOOC operates the shallow water facilities, including the central platform, the Gaolan Onshore Gas Plant (“OSGP”) and a pipeline from the central platform. The OSGP extracts condensate and NGLs and compresses and transports the natural gas to commercial markets in mainland China.
In 2023, the Company’s net production from the Liwan Gas Project was 190.6 MMcf per day of conventional natural gas and 8.8 thousand barrels per day of NGLs (2022 – 230.1 MMcf per day of conventional natural gas and 9.8 thousand barrels per day of NGLs).
| Cenovus Energy Inc. – 2023 Annual Information Form | 10 |
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Block 15/33 and 16/25
The Company holds a production sharing contract (“PSC”) for Block 15/33 which is located in the Pearl River Mouth Basin of the South China Sea, about 140 kilometres southeast of the Hong Kong Special Administrative Region. Cenovus is the operator of the block with a 100 percent working interest.
The PSC of Block 16/25, located close to Block 15/33, was terminated on April 24, 2023, and the remaining obligatory exploration commitment was transferred to a well in Contract Area 29/26 in the South China Sea.
Block DW-1, Taiwan Area
The Company and CPC Corporation (a state-owned oil and gas company), through a joint agreement, have rights to an exploration block covering approximately 7,700 square kilometres located southwest of the Taiwan Area offshore. The Company holds a 75 percent working interest during exploration. CPC Corporation has the right to participate in any future development programs up to a 50 percent interest by paying its proportionate share of all development costs. The current three-dimensional seismic exploration period expires on December 17, 2024.
Indonesia
Madura Strait
The Company has a 40 percent interest in the HCML joint venture, which holds the Madura Strait PSC. The Madura Strait PSC encompasses approximately 2,500 square kilometres in the Madura Strait area, located off the coast of East Java, Indonesia.
The Madura Strait includes the producing BD, MDA, MBH and MAC shallow water fields. It also contains shallow water MDK fields which is under development expected to start production in 2027.
In 2023, the Company’s working interest share of production was 76.0 MMcf per day of conventional natural gas and 2.0 thousand barrels per day of condensate (2022 – 47.6 MMcf per day and 2.6 thousand barrels per day, respectively).
Liman
Located onshore in East Java, Indonesia, the Company holds a 100 percent working interest in the Liman contract area during the exploration phase.
Atlantic Canada
Terra Nova Field
The Terra Nova field is located approximately 350 kilometres southeast of St. John’s, Newfoundland and Labrador in the Jeanne d’Arc Basin. The Terra Nova field is divided into three distinct areas, known as the Graben, the East Flank and the Far East. Cenovus has a 34 percent working interest in the Terra Nova field and Suncor is the operator. Production at the Terra Nova field resumed in November 2023 following the suspension of production in December 2019. The Terra Nova Asset Life Extension project is expected to extend the production life of the Terra Nova field by approximately 10 years and produce an additional 70 million barrels, 23.8 million barrels net to Cenovus.
In 2023, light crude oil production averaged 0.5 thousand barrels per day (2022 – no production).
White Rose Field and Satellite Extensions
The White Rose field is located about 350 kilometres off the coast of Newfoundland and Labrador on the eastern flank of the Jeanne d’Arc Basin. The Company is the operator of the main White Rose field and satellite tiebacks, including the North Amethyst, West White Rose and South White Rose extensions. Cenovus has a working interest of 60 percent in the main field and 56.375 percent in the satellite extensions. The North Amethyst and South White Rose extensions were developed via subsea tieback infrastructure which produce back to the SeaRose floating production storage and offloading unit (“FPSO”).
The West White Rose project is designed to use a drilling and wellhead platform to access resources to the west of the main field and will also produce back to the SeaRose FPSO. The West White Rose project is anticipated to have peak production of 80 thousand barrels per day (45 thousand barrels per day, net to Cenovus) with first oil expected in the first half of 2026.
In 2023, light crude oil production averaged 7.7 thousand barrels per day (2022 – 11.6 thousand barrels per day).
East Coast Exploration
The Company holds working interests ranging from six percent to 100 percent in multiple discovery areas and 30 percent to 72.5 percent in exploration licenses within the Jeanne d’Arc Basin.
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DOWNSTREAM
Canadian Refining
The following table summarizes key operational results for the assets:
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Lloydminster Upgrader | Lloydminster <br>Refinery | Total | Lloydminster Upgrader | Lloydminster <br>Refinery | Total | |
| Heavy Crude Oil Unit Throughput Capacity (1)<br><br>(Mbbls/d) | 81.5 | 29.0 | 110.5 | 81.5 | 29.0 | 110.5 |
| Heavy Crude Oil Unit Throughput (Mbbls/d) | 73.1 | 27.6 | 100.7 | 68.7 | 24.2 | 92.9 |
| Crude Utilization (percent) | 90 | 95 | 91 | 84 | 83 | 84 |
| Total Production (Mbbls/d) | 81.5 | 27.7 | 114.2 | 76.0 | 24.3 | 105.2 |
| Synthetic Crude Oil | 47.6 | — | 47.6 | 46.0 | — | 46.0 |
| Asphalt | — | 15.4 | 15.4 | — | 13.5 | 13.5 |
| Diesel | 12.9 | — | 12.9 | 9.3 | — | 9.3 |
| Other | 21.0 | 12.3 | 33.3 | 20.7 | 10.8 | 31.5 |
| Ethanol (2) | — | — | 5.0 | — | — | 4.9 |
(1)Based on crude oil name plate capacity.
(2)Ethanol production at the Lloydminster, Saskatchewan and Minnedosa, Manitoba ethanol plants.
Lloydminster Upgrader
The Lloydminster Upgrader, located approximately three kilometres east of Lloydminster, Saskatchewan, processes blended heavy crude oil feedstock (including bitumen). The feedstocks are received via the Cold Lake Gathering System and the Saskatchewan Gathering System. The Lloydminster Upgrader produces synthetic crude oil (HSB), ultra-low sulphur diesel and other ancillary products. Production is transported via railcar and truck to primary markets in Western and Eastern Canada. Synthetic crude oil is sold into the Alberta market or used as refinery feedstock in our U.S. Refining segment. In addition, the Upgrader recovers condensate from the feedstock for reuse in the Company’s Oil Sands segment and is transported back via the gathering systems.
Lloydminster Refinery
The Lloydminster Refinery, located in Lloydminster, Alberta, processes blended heavy crude oil into asphalt products used in road construction and maintenance, bulk distillates and industrial products. The feedstocks are received via the Saskatchewan Gathering System. The refined products are transported via railcar and truck to primary markets in Western Canada, the U.S. Upper-Midwest, Rocky Mountain Region and the West Coast. Condensate is recovered from the feedstock for reuse in the Company’s Oil Sands segment and is transported via the gathering system. Distillates are transferred to the Lloydminster Upgrader and blended into the HSB stream or sold directly as industrial products. Industrial products are a blend of medium and light distillate and vacuum gas oil, which are typically sold directly to customers as refinery feedstock, drilling and well-fracturing fluids, or used in asphalt cutbacks and emulsions.
Due to the seasonal demand for asphalt products, many asphalt refineries typically operate at full capacity only during the paving season in Canada and the northern U.S. The Company has implemented various strategies to increase refinery throughput outside of the paving season, such as increasing storage capacity and developing U.S. markets for asphalt products. This allows the Lloydminster Refinery to run at or near full capacity throughout the year.
In addition to sales directly from the Lloydminster Refinery, the Company owns an asphalt distribution network composed of four asphalt terminals located in: Kamloops, British Columbia; Edmonton, Alberta; Yorkton, Saskatchewan; and Winnipeg, Manitoba. The Company also owns an emulsion plant located in Saskatoon, Saskatchewan.
Bruderheim Crude-by-Rail Terminal
The Company owns a crude-by-rail loading facility near Edmonton, Alberta. The Bruderheim crude-by-rail terminal has a storage tank capacity of 240.0 thousand barrels and a loading capacity of 120.0 thousand barrels per day and is part of the Company’s strategy to create additional transportation options for our products and is designed to help us capture global prices for our crude oil production. The Company has hired a third-party service provider to assist in operating the rail terminal. The Company leases a fleet of coiled and insulated rail cars to safely transport our products to market.
Total volumes loaded at the Bruderheim Terminal averaged 16.1 thousand barrels per day in 2023 (2022 – 12.2 thousand barrels per day), this includes crude oil volumes from our Oil Sands segment.
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Ethanol Plants
The Company owns and operates two ethanol plants, located in Lloydminster, Saskatchewan and Minnedosa, Manitoba. Fuel grade ethanol is produced from grain-based feedstock. Each ethanol plant has an annual name plate capacity of 130 million litres.
The Lloydminster ethanol plant captures carbon dioxide for use in the Company’s Lloydminster conventional heavy oil assets and ethanol produced at the plant has a low carbon intensity designation. At the Minnedosa ethanol plant, the Company is progressing a carbon capture and sequestration project to also achieve lower carbon intensity ethanol production. In 2023, the Company continued to test and evaluate appraisal drilling to help better understand the carbon sequestration potential and next steps.
Commercial Fuels Business
Cenovus’s commercial operating model is balanced by corporate owned/dealer operated and branded dealer-owned-and-operated sites. The network consists of travel centres and cardlocks serving urban and rural markets across Canada and bulk distributors offering direct sales to commercial and agricultural markets.
The following table shows the number of locations by province as at December 31, 2023:
| British<br><br>Columbia | Alberta | Saskatchewan | Manitoba | Ontario | Quebec | Nova Scotia | Total | |
|---|---|---|---|---|---|---|---|---|
| Cardlocks | 36 | 22 | 4 | 7 | 21 | 1 | 1 | 92 |
| Bulk Plants | 3 | 7 | 2 | 1 | — | — | — | 13 |
| Travel Centres | 15 | 16 | 3 | 3 | 19 | — | — | 56 |
| Total | 54 | 45 | 9 | 11 | 40 | 1 | 1 | 161 |
U.S. Refining
The following table summarizes key operational results for the refineries:
| 2023 | 2022 | |
|---|---|---|
| Crude Oil Unit Throughput Capacity (1) (2) (Mbbls/d) | 635.2 | 551.5 |
| Crude Oil Unit Throughput (2) (Mbbls/d) | 459.7 | 400.8 |
| Heavy Crude Oil | 173.9 | 116.1 |
| Light and Medium Crude Oil | 285.8 | 284.7 |
| Crude Utilization (2) (3) (percent) | 75 | 80 |
| Total Refined Product Production (Mbbls/d) | 485.0 | 419.9 |
| Gasoline | 231.2 | 199.8 |
| Distillates (4) | 167.0 | 153.4 |
| Asphalt | 19.8 | 8.9 |
| Other | 67.0 | 57.8 |
(1)Based on crude oil name plate capacity.
(2)Includes Cenovus’s 50 percent interest in the non-operated Wood River and Borger refinery operations.
(3)The Superior Refinery’s crude oil unit throughput and crude oil unit throughput capacity are included in the crude utilization calculation effective April 1, 2023. The Toledo Refinery’s crude utilization includes a weighted average crude oil capacity with full ownership acquired on February 28, 2023.
(4)Includes diesel and jet fuel.
Operated Refineries
The following table summarizes key operational results for operated refineries:
| 2023 | 2022 | |||||||
|---|---|---|---|---|---|---|---|---|
| Lima | Toledo | Superior | Total | Lima | Toledo | Superior | Total | |
| Crude Oil Unit Throughput Capacity (1) (Mbbls/d) | 178.7 | 160.0 | 49.0 | 387.7 | 175.0 | 80.0 | 49.0 | 304.0 |
| Crude Oil Unit Throughput (2) (Mbbls/d) | 152.7 | 83.1 | 22.6 | 258.4 | 157.9 | 36.3 | — | 194.2 |
| Crude Utilization (3) (percent) | 85 | 57 | 61 | 71 | 90 | 45 | — | 76 |
(1)Based on crude oil name plate capacity.
(2)Crude oil unit throughput is sourced from Canada and the U.S. and is composed of heavy crude oil and light crude oil.
(3)The Superior Refinery’s crude oil unit throughput and crude oil unit throughput capacity are included in the crude utilization calculation effective April 1, 2023. The Toledo Refinery’s crude utilization includes a weighted average crude oil capacity with full ownership acquired on February 28, 2023.
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Lima Refinery
The Lima Refinery is located in Lima, Ohio, approximately 150 kilometres northwest of Columbus, Ohio. The refinery processes heavy, light and synthetic crude oil, and has the capability to process HSB produced at the Lloydminster Upgrader and CLB produced at Foster Creek. The crude oil feedstocks are received via the Mid-Valley and Marathon Pipelines. The Lima Refinery produces low-sulphur gasoline, gasoline blend stocks, ultra-low sulphur diesel, jet fuel, petrochemical feedstock and other by-products. The refined products are transported via the Buckeye, Inland and Energy Transfer Partners pipeline systems and by railcar to primary markets in Ohio, Illinois, Indiana, Pennsylvania and southern Michigan.
Toledo Refinery
On February 28, 2023, Cenovus acquired the remaining 50 percent interest in the Toledo Refinery from bp, giving Cenovus full ownership and operatorship of the refinery, and further integrating Cenovus’s heavy oil production and refining capabilities. The Toledo Refinery returned to full operations in June 2023 following an incident in late 2022.
The Toledo Refinery is located near Toledo, Ohio, approximately 210 kilometres north of Columbus, Ohio. The refinery processes heavy, light and high total acid number (“high TAN”) crude oil, and has the capability to process WDB produced at Sunrise, CDB produced at Christina Lake and CLB produced at Foster Creek, in addition to other third party high TAN crude oil such as AWB. The refinery also processes HSB produced at the Lloydminster Upgrader. The crude oil feedstocks are received via the Mid-Valley, Marathon and Enbridge Mainline Pipelines. The refinery produces gasoline, diesel, jet fuel and other products. The refined products are transported via the Buckeye, Inland and Energy Transfer Partners pipeline systems and by barge and railcar to primary markets in Ohio, Illinois, Indiana, Pennsylvania and southern Michigan.
Superior Refinery
The Superior Refinery is located in Superior, Wisconsin, approximately 250 kilometres northeast of Minneapolis, Minnesota. On April 26, 2018, the Superior refinery experienced an incident while preparing for a major turnaround and was taken out of operation. Cenovus made significant progress towards a return to full operations with the circulation of hydrocarbons in February, the introduction of crude oil in mid-March and the restart of the FCCU in early October.
The refinery processes heavy, light and synthetic crude oil, including HSB produced at the Lloydminster Upgrader. The crude oil feedstocks are received via Enbridge’s Canadian mainline systems from Alberta, Canada, and the U.S. pipeline system from the Bakken region in North Dakota, arriving at the Enbridge Superior Terminal adjacent to the Superior Refinery. The refinery produces various grades of asphalt, low-sulphur gasoline, low-sulphur diesel, gasoline blendstocks, and other by-products. Refined products are transported via the Magellan Pipeline system south to the Minneapolis market and to local markets via truck loaded at the Superior Terminal. Asphalt is loaded at the Superior rail and truck loading facilities and transported to markets primarily in Minnesota, Wisconsin, North Dakota, and Michigan.
Non-Operated Refineries
Cenovus has a 50 percent interest in the Wood River and Borger refineries. During the year ended December 31, 2023, the combined Wood River and Borger crude oil unit throughput was 201.3 thousand barrels per day (2022 – 206.6 thousand barrels per day) and combined crude utilization was 81 percent (2022 – 83 percent).
Wood River Refinery
The Wood River Refinery ranks in the top 10 percent of approximately 130 refineries in the U.S. based on total crude oil processing capacity of 346.0 thousand barrels per day. It is located in Roxana, Illinois, approximately 25 kilometres northeast of St. Louis, Missouri. The Wood River Refinery processes light low-sulphur and heavy high-sulphur crude oil that it receives via the Keystone, Capline, Ozark and Capwood Pipelines to produce gasoline, diesel and jet fuel, petrochemical feedstock as well as petroleum coke and asphalt. The refinery also has the capability to process CDB produced at Christina Lake. The gasoline, diesel and jet fuel are transported via the Explorer, Buckeye, and Marathon Pipelines to markets in the upper U.S. Midwest. Other products are transported via pipeline, truck, barge and railcar to various markets.
Borger Refinery
The Borger Refinery is located in Borger, Texas, approximately 80 kilometres north of Amarillo, Texas with a total stated crude oil processing capacity of 149.0 thousand barrels per day. The Borger Refinery processes mainly medium and heavy high-sulphur crude oil that it receives via the WA/80 and Borger Express Pipelines to produce gasoline, diesel and jet fuel, along with solvents and other products. The refined products are transported via the Denver, Powder River, Amarillo and Gold Line Pipelines and by truck and railcar to markets in Texas, New Mexico, Colorado and the U.S. mid-continent.
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Storage and Distribution Network
The Company has refined product storage and a U.S. asphalt distribution network composed of five terminals. These terminals include: the Superior Products Terminal in Superior, Wisconsin (where refinery products are unloaded); the Duluth Terminal in Duluth/Esko, Minnesota (storage capacity – 180.0 thousand barrels); the Duluth Marine Terminal in Duluth, Minnesota (storage capacity – 14.0 thousand barrels); the Rhinelander Asphalt Terminal in Rhinelander, Wisconsin (storage capacity – 157.0 thousand barrels); and the Crookston Asphalt Terminal in Crookston, Minnesota (storage capacity – 136.0 thousand barrels). In addition, the Superior Refinery has a working tank capacity of 2.6 million barrels. The Company also markets asphalt from independently operated terminals located in the states of Minnesota, Wisconsin and Ohio.
COMPETITIVE CONDITIONS
All aspects of the energy industry are highly competitive. For further information on the competitive conditions affecting Cenovus, refer to the section entitled Risk Management and Risk Factors in the Company’s annual 2023 MD&A, which section is incorporated by reference into this AIF and available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
ENVIRONMENTAL PROTECTION
All phases of our upstream and downstream operations, including the marketing of Cenovus’s production and third-party commodity traded volumes, are subject to environmental regulation pursuant to a variety of federal, provincial, territorial, state and regional laws and regulations in the jurisdictions in which Cenovus operates. For further information on the environmental regulations affecting Cenovus, refer to the section entitled Risk Management and Risk Factors in the Company’s annual 2023 MD&A, which section is incorporated by reference into this AIF and available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
CODE OF BUSINESS CONDUCT AND ETHICS
Cenovus has established policies and standards relating to the conduct of business in a safe, ethical, legal and sustainable manner. Cenovus’s commitment in these areas is reflected in the Code of Business Conduct & Ethics (the “Code”) which is approved by the Board, our highest level of governance. The Code applies to the Company’s directors, officers, employees, and contractors who are regularly required to review the Code to confirm they understand their individual responsibilities and that they conform to its requirements. Suppliers who conduct activities for, or on behalf of, Cenovus are expected to review the Code and align with the principles and guidance it provides. The Code addresses Cenovus’s expectations concerning its values and reputation, acting with integrity (including the Company’s approach to lobbying and public advocacy), responsible information use, compliance with laws and regulations and speaking up about deviations from the Code. The Code uses plain language, includes a message from Cenovus’s President & Chief Executive Officer and provides examples to address the expectations of the Code. The Code is readily accessible on Cenovus’s intranet and on the Company’s website at cenovus.com.
Sustainability Policy
Cenovus’s Sustainability Policy addresses business conduct to help ensure the Company’s activities are undertaken in a responsible, transparent and respectful manner and in compliance with all applicable laws, regulations and industry standards in the jurisdictions in which Cenovus operates. The Sustainability Policy specifically references the following matters: governance and leadership, people, environment, stakeholder engagement, Indigenous reconciliation and community involvement and investment.
With respect to the environment, the Sustainability Policy provides that Cenovus recognizes the importance of integrating environmental considerations into Cenovus’s business plans, spending decisions, performance management, project development, operations, communications and stakeholder relations. It also provides for the tracking and reporting on a broad range of environmental metrics in respect of Cenovus, in line with standards, to support environmental stewardship and continuous improvement. The Sustainability Policy also reiterates the Company’s commitment to limiting its impact on climate, air, water, land and wildlife by investing in technology, continuously improving its operating practices and collaborating with third parties to find innovative solutions to minimize Cenovus’s environmental impact and maximize business value.
With respect to social aspects, the Sustainability Policy provides that Cenovus recognizes the importance of prioritizing the health and safety of all workers involved in its operations, as well as the residents of the communities where Cenovus works. In addition, it discusses the importance of treating workers with dignity, fairness and respect in order to support an inclusive and diverse workplace and evidences Cenovus’s support for the principles of the Universal Declaration of Human Rights. The Sustainability Policy also addresses the importance of Cenovus fostering positive relationships with Indigenous communities and other stakeholders through communication based on honesty, trust and respect with the objective of building and maintaining long-term, mutually beneficial relationships. In furtherance of this, and in an effort to create a positive impact for both Cenovus and the communities in which it operates, the Sustainability Policy also acknowledges the importance of investments by Cenovus in organizations and initiatives that improve people’s quality of life in the communities where we live and work. The Sustainability Policy is readily accessible on Cenovus’s intranet and on the Company’s website at cenovus.com.
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Additional Policy Information
In addition to the Code and Sustainability Policy, Cenovus has established other policies, including the Human Rights and Indigenous Relations policies, and practices that in some instances relate to environmental or social aspects of Cenovus’s business. The Human Rights Policy formalizes our commitment to human rights, reflects our values and behaviors and further supports the sustainable operation of our business. The Indigenous Relations Policy aims to ensure Indigenous relations across the Company are supported by a consistent approach based on respect, honesty and integrity. Cenovus’s directors, management, employees and contractors are periodically required to complete policy training to review and commit to the Sustainability Policy, the Code, and other key policies and standards. Stakeholders, employees and contractors are encouraged to report any business conduct concerns, including violations of applicable laws or any Cenovus policy, through the Company’s anonymous Integrity Helpline. Employees and contractors may also report any such concerns to their supervisor, a human resources business partner or a member of the Investigations Committee.
The aforementioned policies are accessible on the Company’s website at cenovus.com, as is Cenovus’s annual ESG report. The ESG report is published annually to detail management’s efforts and performance across environment, social and governance topics that are important to its stakeholders.
EMPLOYEES
The following table summarizes Cenovus’s full-time equivalent (“FTE”) employees as at December 31, 2023:
| 2023 | |
|---|---|
| Upstream Operations | 2,860 |
| Downstream Operations | 2,241 |
| Corporate (1) | 1,824 |
| Total FTE Employees | 6,925 |
(1) Includes employees within Corporate and Operations Services; Finance and Risk; People Services; Strategy, Fundamentals and Portfolio Management, Value Chain Optimization, Corporate Development and Planning; Sustainability and Stakeholder Engagement; and Legal.
Cenovus also engages contractors and service providers. For further information on employee and other workforce related risks affecting Cenovus, refer to the section entitled Risk Management and Risk Factors in the Company’s annual 2023 MD&A, which section is incorporated by reference into this AIF and available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
| RISK FACTORS |
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A discussion of risk factors can be found in the section entitled Risk Management and Risk Factors in the Company’s annual 2023 MD&A, which section is incorporated by reference into this AIF and is available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
| RESERVES DATA AND OTHER OIL AND GAS INFORMATION |
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As a Canadian issuer, Cenovus is subject to the reporting requirements of Canadian securities regulatory authorities, including the reporting of the Company’s reserves in accordance with National Instrument 51-101 “Standards of Disclosure for Oil and Gas Activities” (“NI 51-101”).
As at December 31, 2023, the Company’s reserves were located in Canada, China and Indonesia. Cenovus retained two independent qualified reserves evaluators (“IQREs”), McDaniel & Associates Consultants Ltd. (“McDaniel”) and GLJ Ltd. (“GLJ”), to evaluate and prepare reports on 100 percent of its bitumen, heavy crude oil, light crude oil and medium crude oil combined (“light and medium oil”), NGLs, conventional natural gas and shale gas proved and probable reserves. McDaniel evaluated approximately 94 percent of Cenovus’s total proved reserves, located in Canada (in Alberta, Saskatchewan and Newfoundland and Labrador), China and Indonesia. GLJ evaluated approximately six percent of the Company’s total proved reserves, located in Alberta and British Columbia, Canada.
The Safety, Sustainability and Reserves Committee (“SSR Committee”), composed entirely of independent directors, reviews, among other things, the qualifications and appointment of the IQREs, the procedures for providing information to the IQREs and the procedures relating to the disclosure of information with respect to oil and gas activities. The SSR Committee meets independently with the management of Cenovus and each IQRE to determine whether any restrictions affected the ability of the IQREs to report on the reserves data without reservation. In addition, the SSR Committee reviews the reserves data and the report of the IQREs and provides a recommendation regarding approval of the reserves disclosure to the Board.
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Classifications of reserves as proved or probable are only attempts to define the degree of certainty associated with the estimates. There are numerous uncertainties inherent in estimating quantities of petroleum reserves. It should not be assumed that the estimates of future net revenues presented in the tables below represent the fair market value of the reserves. There is no assurance that the forecast prices and costs assumptions will be attained and variances could be material. Readers should review the definitions and information contained in “Additional Notes to Reserves Data Tables”, “Definitions” and “Pricing Assumptions” in conjunction with the reserves disclosure. The reserves estimates provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual reserves may be greater than or less than the estimates disclosed. For additional information, see the section entitled Risk Management and Risk Factors in the Company’s annual 2023 MD&A, which section is incorporated by reference into this AIF, and is available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
Cenovus’s reserves data and other oil and gas information contained in this AIF is dated February 14, 2024, with an effective date of December 31, 2023. McDaniel’s and GLJ’s preparation dates of the information are January 19, 2024 and January 4, 2024, respectively.
Disclosure of Reserve Data
The reserves data presented summarizes the Company’s bitumen, heavy crude oil, light and medium oil, NGLs, conventional natural gas, shale gas and total reserves, and the net present value (“NPV”) and future net revenue (“FNR”) for these reserves. The reserves data uses forecast prices and costs prior to provision for interest, general and administrative expenses or the impact of any hedging activities. Estimates of FNR have been presented on a before and after income tax basis.
Additional Notes to Data Tables
•All reserves and FNR were evaluated using forecast prices and costs.
•The estimates of FNR presented do not represent fair market value.
•FNR from reserves excludes cash flows related to Cenovus’s risk management activities.
•For disclosure purposes, Cenovus includes heavy crude oil with bitumen and shale gas with conventional natural gas, as the reserves of heavy crude oil and shale gas are not material (heavy crude oil represents less than one percent of bitumen on a total proved plus probable basis and shale gas represents less than one percent of conventional natural gas on a total proved plus probable basis).
•Indonesia includes Cenovus’s 40 percent interest in HCML.
•In accordance with NI 51-101, NPV and FNR amounts presented include all of Cenovus’s existing estimated abandonment and reclamation costs, plus all forecast estimates of abandonment and reclamation costs attributable to future development activity associated with the reserves.
•BOE estimates and tables may not sum due to rounding.
Definitions
Gross means: (a) in relation to production and reserves, the interest (operated or non-operated) held by Cenovus before deduction of royalties and excludes royalty interests; (b) in relation to wells, the total number of wells in which Cenovus has an interest; and (c) in relation to properties, the total acreage of properties in which Cenovus has an interest.
Net means: (a) in relation to production and reserves, the interest (operated or non-operated) held by Cenovus after deduction of royalties and includes royalty interests; (b) in relation to wells, the number of wells obtained by aggregating Cenovus’s interest (operated or non-operated) in each of its wells; and (c) in relation to properties, the total acreage obtained by aggregating Cenovus’s interest (operated or non-operated) in each of its properties.
Future net revenue is a forecast of revenue, estimated using forecast prices and costs, from the development and production of reserves minus the associated royalties, operating costs, development costs, and abandonment and reclamation costs. It does not include costs related to interest, general and administrative expenses or risk management activities. Future net revenue is presented on a before and after tax basis.
Reserves are estimated remaining quantities of crude oil and natural gas and related substances anticipated to be recoverable from known accumulations, as of a given date, based on analysis of drilling, geological, geophysical and engineering data, the use of established technology and specified economic conditions, which are generally accepted as being reasonable, and are disclosed later in this AIF.
Reserves are classified according to the degree of certainty associated with the estimates:
Proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves.
Probable reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves.
| Cenovus Energy Inc. – 2023 Annual Information Form | 17 |
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Each of the reserves categories may be divided into developed and undeveloped categories:
Developed reserves are those reserves that are expected to be recovered from existing wells and installed facilities or, if facilities have not been installed, that would involve a low expenditure (e.g. when compared with the cost of drilling a well) to put the reserves on production. The developed category may be subdivided as follows:
Developed producing reserves are those reserves that are expected to be recovered from completion intervals open at the time of the estimate. These reserves may be currently producing or, if shut-in, they must have previously been on production, and the date of resumption of production must be known with reasonable certainty.
Developed non-producing reserves are those reserves that either have not been on production, or have previously been on production, but are shut-in, and the date of resumption of production is unknown.
Undeveloped reserves are those reserves expected to be recovered from known accumulations where a significant expenditure (e.g. when compared with the cost of drilling a well) is required to render them capable of production. They must fully meet the requirements of the reserves classification (proved, probable) to which they are assigned.
Pricing Assumptions
Except as noted below, the forecast of prices, inflation and exchange rate provided in the table below is computed using the average of forecasts by McDaniel, GLJ and Sproule Associates Limited and is used to estimate FNR associated with the reserves disclosed herein. This forecast is dated January 1, 2024. The inflation forecast was applied uniformly to prices beyond the forecast interval, and to all future costs. Natural gas prices for China and Indonesia are derived from the natural gas sales agreements specific to each set of projects. For historical prices realized during 2023, see the Production History and Per-Unit Results section in this AIF.
| Crude Oil and NGLs (1) | Natural Gas (2) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Year | WTI Cushing Oklahoma<br><br>(US$/bbl) | Edmonton Par Price 40 API<br><br>(C$/bbl) | Western Canadian Select<br><br>(C$/bbl) | Edmonton C5+<br><br>(C$/bbl) | Brent<br><br>(US$/bbl) | AECO<br><br>(C$/MMBtu) | China<br><br>(US$/Mcf) | Indonesia<br><br>(US$/Mcf) | Inflation Rate<br><br>(%/year) | Exchange Rate<br><br>(US$/C$) |
| 2024 | 73.67 | 92.91 | 76.74 | 96.79 | 78.00 | 2.20 | 8.79 | 7.28 | 0.0 | 0.7517 |
| 2025 | 74.98 | 95.04 | 79.77 | 98.75 | 79.18 | 3.37 | 8.99 | 7.38 | 2.0 | 0.7517 |
| 2026 | 76.14 | 96.07 | 81.12 | 100.71 | 80.36 | 4.05 | 9.28 | 7.45 | 2.0 | 0.7550 |
| 2027 | 77.66 | 97.99 | 82.88 | 102.72 | 81.79 | 4.13 | 9.36 | 7.57 | 2.0 | 0.7550 |
| 2028 | 79.22 | 99.95 | 85.04 | 104.78 | 83.41 | 4.21 | 9.49 | 7.69 | 2.0 | 0.7550 |
| 2029 | 80.80 | 101.95 | 86.74 | 106.87 | 85.09 | 4.30 | 9.97 | 7.81 | 2.0 | 0.7550 |
| 2030 | 82.42 | 103.98 | 88.48 | 109.01 | 86.79 | 4.38 | 10.77 | 7.96 | 2.0 | 0.7550 |
| 2031 | 84.06 | 106.07 | 90.24 | 111.19 | 88.52 | 4.47 | — | 8.07 | 2.0 | 0.7550 |
| 2032 | 85.75 | 108.18 | 92.04 | 113.41 | 90.29 | 4.56 | — | 8.07 | 2.0 | 0.7550 |
| 2033 | 87.46 | 110.35 | 93.89 | 115.67 | 92.10 | 4.65 | — | — | 2.0 | 0.7550 |
| 2034 | 89.21 | 112.56 | 95.77 | 117.98 | 93.94 | 4.74 | — | — | 2.0 | 0.7550 |
| 2035+ | +2.0%/yr | +2.0%/yr | +2.0%/yr | +2.0%/yr | +2.0%/yr | +2.0%/yr | — | — | 2.0 | 0.7550 |
(1)Selected market benchmark prices are used to estimate the FNR related to the Company’s bitumen, light and medium oil and NGLs production.
(2)Selected market benchmark prices and prices derived from the natural gas sales agreements in China and Indonesia are used to estimate the FNR related to the Company’s conventional natural gas.
| Cenovus Energy Inc. – 2023 Annual Information Form | 18 |
|---|
Summary of Oil and Gas Reserves as at December 31, 2023
| Gross Reserves | Bitumen<br><br>(MMbbls) | Light and Medium Oil<br><br>(MMbbls) | NGLs<br><br>(MMbbls) | Conventional<br><br>Natural Gas<br><br>(Bcf) | Total<br><br>(MMBOE) |
|---|---|---|---|---|---|
| Canada | |||||
| Proved | |||||
| Developed Producing | 978 | 32 | 47 | 1,247 | 1,266 |
| Developed Non-Producing | 117 | 1 | 1 | 29 | 123 |
| Undeveloped | 4,316 | 5 | 12 | 347 | 4,390 |
| Total Proved | 5,411 | 38 | 60 | 1,622 | 5,779 |
| Probable | 2,487 | 125 | 36 | 975 | 2,812 |
| Total Proved Plus Probable | 7,899 | 163 | 96 | 2,598 | 8,591 |
| China | |||||
| Proved | |||||
| Developed Producing | — | — | 10 | 262 | 53 |
| Developed Non-Producing | — | — | — | — | — |
| Undeveloped | — | — | — | — | — |
| Total Proved | — | — | 10 | 262 | 53 |
| Probable | — | — | 2 | 76 | 15 |
| Total Proved Plus Probable | — | — | 12 | 337 | 68 |
| Indonesia | |||||
| Proved | |||||
| Developed Producing | — | — | 4 | 178 | 33 |
| Developed Non-Producing | — | — | — | — | — |
| Undeveloped | — | — | — | — | — |
| Total Proved | — | — | 4 | 178 | 33 |
| Probable | — | — | 1 | 49 | 9 |
| Total Proved Plus Probable | — | — | 5 | 226 | 43 |
| Total Company | |||||
| Proved | |||||
| Developed Producing | 978 | 32 | 61 | 1,686 | 1,353 |
| Developed Non-Producing | 117 | 1 | 1 | 29 | 123 |
| Undeveloped | 4,316 | 5 | 12 | 347 | 4,390 |
| Total Proved | 5,411 | 38 | 74 | 2,062 | 5,866 |
| Probable | 2,487 | 125 | 40 | 1,100 | 2,836 |
| Total Proved Plus Probable | 7,899 | 163 | 114 | 3,162 | 8,702 |
| Cenovus Energy Inc. – 2023 Annual Information Form | 19 | ||||
| --- | --- | ||||
| Net Reserves | Bitumen<br><br>(MMbbls) | Light and Medium Oil<br><br>(MMbbls) | NGLs<br><br>(MMbbls) | Conventional<br><br>Natural Gas<br><br>(Bcf) | Total<br><br>(MMBOE) |
| --- | --- | --- | --- | --- | --- |
| Canada | |||||
| Proved | |||||
| Developed Producing | 729 | 29 | 39 | 1,145 | 987 |
| Developed Non-Producing | 83 | — | 1 | 25 | 89 |
| Undeveloped | 3,242 | 4 | 9 | 314 | 3,308 |
| Total Proved | 4,054 | 33 | 49 | 1,485 | 4,383 |
| Probable | 1,790 | 106 | 29 | 874 | 2,070 |
| Total Proved Plus Probable | 5,844 | 139 | 78 | 2,359 | 6,453 |
| China | |||||
| Proved | |||||
| Developed Producing | — | — | 9 | 248 | 51 |
| Developed Non-Producing | — | — | — | — | — |
| Undeveloped | — | — | — | — | — |
| Total Proved | — | — | 9 | 248 | 51 |
| Probable | — | — | 2 | 72 | 14 |
| Total Proved Plus Probable | — | — | 12 | 319 | 65 |
| Indonesia | |||||
| Proved | |||||
| Developed Producing | — | — | 2 | 127 | 23 |
| Developed Non-Producing | — | — | — | — | — |
| Undeveloped | — | — | — | — | — |
| Total Proved | — | — | 2 | 127 | 23 |
| Probable | — | — | — | 27 | 5 |
| Total Proved Plus Probable | — | — | 2 | 154 | 28 |
| Total Company | |||||
| Proved | |||||
| Developed Producing | 729 | 29 | 50 | 1,520 | 1,061 |
| Developed Non-Producing | 83 | — | 1 | 25 | 89 |
| Undeveloped | 3,242 | 4 | 9 | 314 | 3,308 |
| Total Proved | 4,054 | 33 | 60 | 1,859 | 4,457 |
| Probable | 1,790 | 106 | 32 | 973 | 2,089 |
| Total Proved Plus Probable | 5,844 | 139 | 92 | 2,832 | 6,546 |
| Cenovus Energy Inc. – 2023 Annual Information Form | 20 | ||||
| --- | --- |
Summary of Net Present Value of Future Net Revenue as at December 31, 2023
| Discounted at % per year | Unit Value Discounted at 10% (1) | |||||
|---|---|---|---|---|---|---|
| Before Income Taxes ($ millions) | 0% | 5% | 10% | 15% | 20% | $/BOE |
| Canada | ||||||
| Proved | ||||||
| Developed Producing | 26,962 | 27,286 | 24,780 | 22,361 | 20,297 | 25.10 |
| Developed Non-Producing | 4,299 | 3,327 | 2,643 | 2,146 | 1,774 | 29.85 |
| Undeveloped | 158,294 | 68,154 | 35,176 | 20,599 | 13,109 | 10.63 |
| Total Proved | 189,554 | 98,767 | 62,599 | 45,106 | 35,180 | 14.28 |
| Probable | 135,037 | 39,441 | 18,178 | 11,229 | 8,003 | 8.78 |
| Total Proved Plus Probable | 324,591 | 138,208 | 80,776 | 56,336 | 43,183 | 12.52 |
| China | ||||||
| Proved | ||||||
| Developed Producing | 3,044 | 2,762 | 2,527 | 2,329 | 2,160 | 50.02 |
| Developed Non-Producing | — | — | — | — | — | — |
| Undeveloped | — | — | — | — | — | — |
| Total Proved | 3,044 | 2,762 | 2,527 | 2,329 | 2,160 | 50.02 |
| Probable | 890 | 734 | 616 | 524 | 453 | 43.27 |
| Total Proved Plus Probable | 3,934 | 3,496 | 3,143 | 2,853 | 2,613 | 48.53 |
| Indonesia | ||||||
| Proved | ||||||
| Developed Producing | 650 | 576 | 517 | 469 | 429 | 22.36 |
| Developed Non-Producing | — | — | — | — | — | — |
| Undeveloped | — | — | — | — | — | — |
| Total Proved | 650 | 576 | 517 | 469 | 429 | 22.36 |
| Probable | 214 | 166 | 131 | 106 | 87 | 26.34 |
| Total Proved Plus Probable | 863 | 742 | 648 | 575 | 516 | 23.07 |
| Total Company | ||||||
| Proved | ||||||
| Developed Producing | 30,656 | 30,624 | 27,824 | 25,159 | 22,886 | 26.22 |
| Developed Non-Producing | 4,299 | 3,327 | 2,643 | 2,146 | 1,774 | 29.85 |
| Undeveloped | 158,294 | 68,154 | 35,176 | 20,599 | 13,109 | 10.63 |
| Total Proved | 193,248 | 102,106 | 65,643 | 47,904 | 37,769 | 14.73 |
| Probable | 136,140 | 40,340 | 18,925 | 11,860 | 8,543 | 9.06 |
| Total Proved Plus Probable | 329,388 | 142,446 | 84,568 | 59,764 | 46,312 | 12.92 |
(1)Unit values have been calculated using Cenovus’s net reserves.
| Cenovus Energy Inc. – 2023 Annual Information Form | 21 | ||||
|---|---|---|---|---|---|
| Discounted at % per year | |||||
| --- | --- | --- | --- | --- | --- |
| After Income Taxes (1) ($ millions) | 0% | 5% | 10% | 15% | 20% |
| Canada | |||||
| Proved | |||||
| Developed Producing | 20,670 | 21,867 | 20,027 | 18,117 | 16,456 |
| Developed Non-Producing | 3,324 | 2,551 | 2,013 | 1,624 | 1,335 |
| Undeveloped | 121,683 | 51,820 | 26,386 | 15,204 | 9,489 |
| Total Proved | 145,677 | 76,238 | 48,426 | 34,945 | 27,280 |
| Probable | 103,067 | 29,900 | 13,749 | 8,488 | 6,047 |
| Total Proved Plus Probable | 248,744 | 106,138 | 62,174 | 43,432 | 33,327 |
| China | |||||
| Proved | |||||
| Developed Producing | 2,340 | 2,122 | 1,940 | 1,786 | 1,656 |
| Developed Non-Producing | — | — | — | — | — |
| Undeveloped | — | — | — | — | — |
| Total Proved | 2,340 | 2,122 | 1,940 | 1,786 | 1,656 |
| Probable | 674 | 555 | 465 | 395 | 341 |
| Total Proved Plus Probable | 3,014 | 2,677 | 2,405 | 2,182 | 1,996 |
| Indonesia | |||||
| Proved | |||||
| Developed Producing | 457 | 408 | 369 | 336 | 309 |
| Developed Non-Producing | — | — | — | — | — |
| Undeveloped | — | — | — | — | — |
| Total Proved | 457 | 408 | 369 | 336 | 309 |
| Probable | 130 | 101 | 80 | 65 | 53 |
| Total Proved Plus Probable | 587 | 509 | 449 | 401 | 362 |
| Total Company | |||||
| Developed Producing | 23,467 | 24,397 | 22,336 | 20,239 | 18,421 |
| Developed Non-Producing | 3,324 | 2,551 | 2,013 | 1,624 | 1,335 |
| Undeveloped | 121,683 | 51,820 | 26,386 | 15,204 | 9,489 |
| Total Proved | 148,475 | 78,768 | 50,734 | 37,067 | 29,245 |
| Probable | 103,870 | 30,555 | 14,293 | 8,947 | 6,441 |
| Total Proved Plus Probable | 252,345 | 109,324 | 65,027 | 46,014 | 35,686 |
(1)Values are calculated by considering existing tax pools and tax circumstances for Cenovus in the consolidated evaluation of Cenovus’s oil and gas properties and taking into account current tax regulations. Values do not represent an estimate of the value at the legal entity level, which may be significantly different. For information about existing tax pools, please see Cenovus’s consolidated financial statements for the year ended December 31, 2023.
| Cenovus Energy Inc. – 2023 Annual Information Form | 22 |
|---|
Total Undiscounted Future Net Revenue as at December 31, 2023
| ($ millions) | Revenue | Royalties | Operating Costs | Development Costs | Total Abandonment and Reclamation Costs (1) | Future Net Revenue Before Income Taxes | Income Taxes | Future Net Revenue After Income Taxes |
|---|---|---|---|---|---|---|---|---|
| Canada | ||||||||
| Total Proved | 476,182 | 119,705 | 110,143 | 45,085 | 11,694 | 189,554 | 43,877 | 145,677 |
| Total Proved Plus Probable | 790,920 | 204,022 | 173,890 | 75,173 | 13,244 | 324,591 | 75,847 | 248,744 |
| China | ||||||||
| Total Proved | 4,126 | 222 | 621 | 168 | 70 | 3,044 | 704 | 2,340 |
| Total Proved Plus Probable | 5,238 | 282 | 783 | 168 | 71 | 3,934 | 920 | 3,014 |
| Indonesia | ||||||||
| Total Proved | 2,184 | 713 | 789 | 2 | 31 | 650 | 193 | 457 |
| Total Proved Plus Probable | 2,829 | 1,026 | 907 | 2 | 31 | 863 | 276 | 587 |
| Total Company | ||||||||
| Total Proved | 482,491 | 120,640 | 111,553 | 45,255 | 11,795 | 193,248 | 44,773 | 148,475 |
| Total Proved Plus Probable | 798,987 | 205,330 | 175,579 | 75,343 | 13,346 | 329,388 | 77,043 | 252,345 |
(1)Total abandonment and reclamation costs included for all wells, facilities and other liabilities, known and existing, and to be incurred as a result of future development activity.
Future Net Revenue by Product Type as at December 31, 2023
| Reserves Category | Product Types | Future Net Revenue Before Income Taxes Discounted at 10% per Year<br><br>($ millions) | Unit Value<br><br>Discounted at 10% per Year (1)<br><br>($/BOE) |
|---|---|---|---|
| Total Proved | Bitumen | 61,276 | 15.11 |
| Light and Medium Oil (2) | 391 | 4.96 | |
| Conventional Natural Gas (3) | 3,976 | 12.28 | |
| Total | 65,643 | 14.73 | |
| Total Proved Plus | Bitumen | 75,386 | 12.90 |
| Probable | Light and Medium Oil (2) | 3,348 | 16.56 |
| Conventional Natural Gas (3) | 5,835 | 11.66 | |
| Total | 84,568 | 12.92 |
(1)Unit values have been calculated using Cenovus’s net reserves.
(2)Includes solution gas and other byproducts, which includes NGLs.
(3)Includes other byproducts, which includes NGLs, but excludes solution gas.
| Cenovus Energy Inc. – 2023 Annual Information Form | 23 |
|---|
Future Development Costs
The following table outlines undiscounted future development costs deducted in the estimation of FNR, by reserves category:
| ($ millions) | 2024 | 2025 | 2026 | 2027 | 2028 | Remainder | Total |
|---|---|---|---|---|---|---|---|
| Canada | |||||||
| Total Proved | 2,970 | 1,972 | 1,830 | 1,648 | 1,536 | 35,128 | 45,085 |
| Total Proved Plus Probable | 3,472 | 2,668 | 2,131 | 2,052 | 1,816 | 63,034 | 75,173 |
| China | |||||||
| Total Proved | 33 | 53 | 60 | 5 | 5 | 11 | 168 |
| Total Proved Plus Probable | 33 | 53 | 60 | 5 | 5 | 11 | 168 |
| Indonesia | |||||||
| Total Proved | 2 | — | — | — | — | — | 2 |
| Total Proved Plus Probable | 2 | — | — | — | — | — | 2 |
| Total Company | |||||||
| Total Proved | 3,005 | 2,025 | 1,890 | 1,653 | 1,542 | 35,139 | 45,255 |
| Total Proved Plus Probable | 3,507 | 2,721 | 2,191 | 2,057 | 1,821 | 63,045 | 75,343 |
Cenovus believes that existing cash and cash equivalents balances, internally generated cash flows, existing credit facilities, management of its asset portfolio and access to capital markets will be sufficient to fund the Company’s future development costs. However, there can be no guarantee that the necessary funds will be available or that Cenovus will allocate funding to develop all of its reserves. Failure to develop those reserves would have a negative impact on the Company’s FNR.
The interest or other costs of external funding are not included in the reserves and FNR estimates and would reduce FNR depending upon the funding sources utilized. Cenovus does not believe that interest or other funding costs would make development of any property uneconomic.
| Cenovus Energy Inc. – 2023 Annual Information Form | 24 |
|---|
Reserves Reconciliation as at December 31, 2023
| Gross Reserves, Total Proved | Bitumen<br><br>(MMbbls) | Light and Medium Oil<br><br>(MMbbls) | NGLs<br><br>(MMbbls) | Conventional<br><br>Natural Gas<br><br>(Bcf) | Total<br><br>(MMBOE) |
|---|---|---|---|---|---|
| Canada | |||||
| As at December 31, 2022 | 5,592 | 42 | 66 | 1,680 | 5,980 |
| Extensions and Improved Recovery | 110 | 3 | 5 | 159 | 144 |
| Discoveries | — | — | — | — | — |
| Technical Revisions | (84) | (2) | (2) | 2 | (88) |
| Economic Factors | 1 | — | — | (9) | (1) |
| Acquisitions | 9 | — | — | 1 | 9 |
| Dispositions | — | — | — | (3) | (1) |
| Production (1) | (217) | (5) | (8) | (208) | (264) |
| As at December 31, 2023 | 5,411 | 38 | 60 | 1,622 | 5,779 |
| China | |||||
| As at December 31, 2022 | — | — | 12 | 331 | 67 |
| Extensions and Improved Recovery | — | — | — | — | — |
| Discoveries | — | — | — | — | — |
| Technical Revisions | — | — | 1 | — | 1 |
| Economic Factors | — | — | — | — | — |
| Acquisitions | — | — | — | — | — |
| Dispositions | — | — | — | — | — |
| Production | — | — | (3) | (70) | (15) |
| As at December 31, 2023 | — | — | 10 | 262 | 53 |
| Indonesia | |||||
| As at December 31, 2022 | — | — | 4 | 183 | 35 |
| Extensions and Improved Recovery | — | — | — | 14 | 2 |
| Discoveries | — | — | — | — | — |
| Technical Revisions | — | — | 1 | 9 | 2 |
| Economic Factors | — | — | — | — | — |
| Acquisitions | — | — | — | — | — |
| Dispositions | — | — | — | — | — |
| Production | — | — | (1) | (28) | (5) |
| As at December 31, 2023 | — | — | 4 | 178 | 33 |
| Total Company | |||||
| As at December 31, 2022 | 5,592 | 42 | 82 | 2,194 | 6,082 |
| Extensions and Improved Recovery | 110 | 3 | 5 | 173 | 146 |
| Discoveries | — | — | — | — | — |
| Technical Revisions | (84) | (2) | (1) | 11 | (85) |
| Economic Factors | 1 | — | — | (9) | (1) |
| Acquisitions | 9 | — | — | 1 | 9 |
| Dispositions | — | — | — | (3) | (1) |
| Production (1) | (217) | (5) | (12) | (305) | (284) |
| As at December 31, 2023 | 5,411 | 38 | 74 | 2,062 | 5,866 |
| Cenovus Energy Inc. – 2023 Annual Information Form | 25 | ||||
| --- | --- | ||||
| Gross Reserves, Probable | Bitumen<br><br>(MMbbls) | Light and Medium Oil<br><br>(MMbbls) | NGLs<br><br>(MMbbls) | Conventional<br><br>Natural Gas<br><br>(Bcf) | Total<br><br>(MMBOE) |
| --- | --- | --- | --- | --- | --- |
| Canada | |||||
| As at December 31, 2022 | 2,448 | 129 | 35 | 897 | 2,762 |
| Extensions and Improved Recovery | 46 | 4 | 3 | 91 | 68 |
| Discoveries | — | — | — | — | — |
| Technical Revisions | (36) | (7) | (1) | (10) | (46) |
| Economic Factors | — | — | — | (2) | — |
| Acquisitions | 29 | — | — | — | 29 |
| Dispositions | — | — | — | (1) | — |
| Production (1) | — | — | — | — | — |
| As at December 31, 2023 | 2,487 | 125 | 36 | 975 | 2,812 |
| China | |||||
| As at December 31, 2022 | — | — | 2 | 65 | 13 |
| Extensions and Improved Recovery | — | — | — | — | — |
| Discoveries | — | — | — | — | — |
| Technical Revisions | — | — | — | 12 | 2 |
| Economic Factors | — | — | — | — | — |
| Acquisitions | — | — | — | — | — |
| Dispositions | — | — | — | — | — |
| Production | — | — | — | — | — |
| As at December 31, 2023 | — | — | 2 | 76 | 15 |
| Indonesia | |||||
| As at December 31, 2022 | — | — | 2 | 67 | 12 |
| Extensions and Improved Recovery | — | — | — | (14) | (2) |
| Discoveries | — | — | — | — | — |
| Technical Revisions | — | — | — | (5) | (1) |
| Economic Factors | — | — | — | — | — |
| Acquisitions | — | — | — | — | — |
| Dispositions | — | — | — | — | — |
| Production | — | — | — | — | — |
| As at December 31, 2023 | — | — | 1 | 49 | 9 |
| Total Company | |||||
| As at December 31, 2022 | 2,448 | 129 | 39 | 1,029 | 2,787 |
| Extensions and Improved Recovery | 46 | 4 | 3 | 78 | 65 |
| Discoveries | — | — | — | — | — |
| Technical Revisions | (36) | (7) | (1) | (3) | (44) |
| Economic Factors | — | — | — | (3) | — |
| Acquisitions | 29 | — | — | — | 29 |
| Dispositions | — | — | — | (1) | — |
| Production (1) | — | — | — | — | — |
| As at December 31, 2023 | 2,487 | 125 | 40 | 1,100 | 2,836 |
| Cenovus Energy Inc. – 2023 Annual Information Form | 26 | ||||
| --- | --- | ||||
| Gross Reserves, Total Proved Plus Probable | Bitumen<br><br>(MMbbls) | Light and Medium Oil<br><br>(MMbbls) | NGLs<br><br>(MMbbls) | Conventional<br><br>Natural Gas<br><br>(Bcf) | Total<br><br>(MMBOE) |
| --- | --- | --- | --- | --- | --- |
| Canada | |||||
| As at December 31, 2022 | 8,040 | 171 | 101 | 2,577 | 8,742 |
| Extensions and Improved Recovery | 157 | 6 | 7 | 250 | 212 |
| Discoveries | — | — | — | — | — |
| Technical Revisions | (120) | (9) | (3) | (8) | (134) |
| Economic Factors | 1 | — | — | (11) | (1) |
| Acquisitions | 38 | — | — | 1 | 38 |
| Dispositions | — | — | — | (4) | (1) |
| Production (1) | (217) | (5) | (8) | (208) | (264) |
| As at December 31, 2023 | 7,899 | 163 | 96 | 2,598 | 8,591 |
| China | |||||
| As at December 31, 2022 | — | — | 14 | 396 | 80 |
| Extensions and Improved Recovery | — | — | — | — | — |
| Discoveries | — | — | — | — | — |
| Technical Revisions | — | — | 1 | 11 | 3 |
| Economic Factors | — | — | — | — | — |
| Acquisitions | — | — | — | — | — |
| Dispositions | — | — | — | — | — |
| Production | — | — | (3) | (70) | (15) |
| As at December 31, 2023 | — | — | 12 | 337 | 68 |
| Indonesia | |||||
| As at December 31, 2022 | — | — | 6 | 250 | 47 |
| Extensions and Improved Recovery | — | — | — | — | — |
| Discoveries | — | — | — | — | — |
| Technical Revisions | — | — | — | 4 | 1 |
| Economic Factors | — | — | — | — | — |
| Acquisitions | — | — | — | — | — |
| Dispositions | — | — | — | — | — |
| Production | — | — | (1) | (28) | (5) |
| As at December 31, 2023 | — | — | 5 | 226 | 43 |
| Total Company | |||||
| As at December 31, 2022 | 8,040 | 171 | 121 | 3,223 | 8,869 |
| Extensions and Improved Recovery | 157 | 6 | 7 | 250 | 212 |
| Discoveries | — | — | — | — | — |
| Technical Revisions | (120) | (9) | (2) | 8 | (130) |
| Economic Factors | 1 | — | — | (11) | (1) |
| Acquisitions | 38 | — | — | 1 | 38 |
| Dispositions | — | — | — | (4) | (1) |
| Production (1) | (217) | (5) | (12) | (305) | (284) |
| As at December 31, 2023 | 7,899 | 163 | 114 | 3,162 | 8,702 |
(1)Production used for the reserves reconciliation differs from publicly reported production. In accordance with NI 51-101, gross production used for the reserves reconciliation above includes Cenovus’s share of natural gas volumes provided to FCCL for steam generation, but does not include royalty interest production.
| Cenovus Energy Inc. – 2023 Annual Information Form | 27 |
|---|
Developments in 2023 compared with 2022 include:
•Bitumen gross total proved and gross total proved plus probable reserves decreased by 181 million barrels and 141 million barrels, respectively. The changes were due to current year production and recovery factor adjustments at Christina Lake and Foster Creek, partially offset by additions from regulatory approvals at Foster Creek and Lloydminster thermal, updates to the Sunrise development plan, an acquisition in the Oil Sands segment and improved recovery performance at Lloydminster thermal.
•Light and medium oil gross total proved and gross total proved plus probable reserves decreased by 4 million barrels and 8 million barrels, respectively. The changes were due to current year production and technical revisions, partially offset by additions from updates to the Atlantic region and Conventional segment development plans.
•NGLs gross total proved and gross total proved plus probable reserves decreased by 8 million barrels and 7 million barrels, respectively. The changes were due to current year production, partially offset by additions from updates to the Conventional segment development plans.
•Conventional natural gas gross total proved and gross total proved plus probable reserves decreased by 132 billion cubic feet and 61 billion cubic feet, respectively. The changes were due to current year production, partially offset by updates to the Conventional segment development plans and updates to gas contracts in Asia Pacific.
Undeveloped Reserves
Proved and probable undeveloped reserves have been estimated by the IQREs in accordance with procedures and standards contained in the Canadian Oil and Gas Evaluation Handbook as amended from time to time (the “COGE Handbook”). Undeveloped reserves are scheduled to be produced within the next 50 years.
The undeveloped tables presented here reflect Cenovus’s gross reserves and the product type groups reported above.
Proved Undeveloped (Gross Reserves)
| Bitumen<br><br>(MMbbls) | Light and Medium Oil<br><br>(MMbbls) | NGLs<br><br>(MMbbls) | Conventional<br><br>Natural Gas<br><br>(Bcf) | Total<br><br>(MMBOE) | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| First<br><br>Attributed | Total | First<br><br>Attributed | Total | First<br><br>Attributed | Total | First<br><br>Attributed | Total | First<br><br>Attributed | Total | |
| 2021 | 694 | 4,490 | 23 | 23 | 5 | 9 | 278 | 356 | 768 | 4,582 |
| 2022 | 313 | 4,442 | 2 | 4 | 3 | 13 | 158 | 382 | 344 | 4,523 |
| 2023 | 105 | 4,316 | 1 | 5 | 2 | 12 | 64 | 347 | 119 | 4,390 |
Probable Undeveloped (Gross Reserves)
| Bitumen<br><br>(MMbbls) | Light and Medium Oil<br><br>(MMbbls) | NGLs<br><br>(MMbbls) | Conventional<br><br>Natural Gas<br><br>(Bcf) | Total<br><br>(MMBOE) | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| First<br><br>Attributed | Total | First<br><br>Attributed | Total | First<br><br>Attributed | Total | First<br><br>Attributed | Total | First<br><br>Attributed | Total | |
| 2021 | 289 | 1,692 | 139 | 140 | 6 | 16 | 267 | 440 | 478 | 1,922 |
| 2022 | 633 | 2,281 | 1 | 116 | 4 | 19 | 186 | 513 | 669 | 2,502 |
| 2023 | 84 | 2,320 | 4 | 119 | 4 | 21 | 106 | 561 | 109 | 2,553 |
| Cenovus Energy Inc. – 2023 Annual Information Form | 28 | |||||||||
| --- | --- |
Development of Proved and Probable Undeveloped Reserves
Bitumen
Cenovus’s bitumen reserves are entirely within the Oil Sands segment. Gross proved undeveloped bitumen reserves of 4,316 million barrels account for approximately 80 percent of the Company’s total gross proved bitumen reserves. Of Cenovus’s 2,487 million barrels of gross probable bitumen reserves, 2,320 million barrels, or approximately 93 percent, are undeveloped. Based on the evaluation of these reserves, Cenovus anticipates that the reserves will be recovered using SAGD, except for the heavy crude oil, which is not material.
Typical SAGD project development involves the initial installation of a steam generation facility, at a cost much greater than drilling a production/injection well pair, and then progressively drilling sufficient SAGD well pairs to fully utilize the available steam.
Bitumen reserves can be classified as proved when there is sufficient stratigraphic drilling to demonstrate, with a high degree of certainty, the presence of bitumen in commercially recoverable volumes. McDaniel’s standard for sufficient drilling in a fluvial SAGD formation is a minimum of eight stratigraphic wells per section with 3D seismic or 16 stratigraphic wells per section with no seismic. Additionally, operator funding approvals must be in place, a reasonable development timetable must be established and all requisite legal and regulatory approvals must have been obtained. Proved developed bitumen reserves are differentiated from proved undeveloped bitumen reserves by the presence of drilled production/injection well pairs at the reserves estimation effective date. Because a steam generation facility has a long life relative to well pairs, in the early stages of a SAGD project, only a small portion of proved reserves will be developed as the number of well pairs drilled will be limited by the available steam capacity.
Recognition of probable reserves requires sufficient drilling of stratigraphic wells to establish reservoir suitability for SAGD. McDaniel’s standard for probable reserves is a minimum of four stratigraphic wells per section. Reserves will be classified by McDaniel as probable if the number of stratigraphic wells drilled falls between their proved reserves and probable reserves requirements. In Alberta, if the reserves are located outside of an approved development plan area, but within an approved project area, they will be classified as probable reserves as long as they exceed the minimum stratigraphic well requirement. If reserves lie outside an approved development area, approval to include those reserves in the development area must be obtained before development drilling of SAGD well pairs can commence.
Development of the Christina Lake, Foster Creek, Lloydminster thermal and Sunrise proved and probable undeveloped reserves will take place in an orderly manner as additional well pairs are drilled to utilize the available steam capacity when existing well pairs reach the end of their steam injection phase. Development and capital spending on the proved and probable undeveloped reserves at Narrows Lake continues with the tieback into the Christina Lake plant. First steam is expected in 2025. The forecasted production of Cenovus’s proved and proved plus probable SAGD bitumen reserves, extends approximately 43 years and 50 years, respectively. Production of the current proved developed portion is estimated to take approximately 22 years.
Light and Medium Oil, NGLs and Conventional Natural Gas
Cenovus’s Conventional segment gross proved undeveloped and gross proved plus probable undeveloped reserves of light and medium oil, NGLs and conventional natural gas are approximately one percent and two percent, respectively, of the Company’s gross total proved and gross total proved plus probable reserves. Cenovus plans to develop the Conventional segment’s proved and proved plus probable undeveloped reserves over the next five years and 10 years, respectively. Decisions on the priority and timing of developing the various proved and probable undeveloped reserves, including decisions to defer development of proved and probable undeveloped reserves beyond two years, are based on various factors including strategic considerations, changing economic conditions, changes to government regulations including the setting of production limits, technical performance, development plan optimization, facility capacity, pipeline constraints, and the size of the development program. The development opportunities have been pursued at a pace dependent on capital availability and its allocation in accordance with Cenovus’s business plans.
Cenovus’s Offshore segment gross proved plus probable undeveloped reserves of light and medium oil, NGLs and conventional natural gas are approximately one percent of the Company’s gross total proved plus probable reserves. The probable undeveloped reserves attributed to the West White Rose project are currently scheduled to be on stream in 2026.
Significant Factors or Uncertainties Affecting Reserves Data
The evaluation of reserves is a continuous process that can be significantly impacted by a variety of internal and external influences. Revisions are often required resulting from changes in pricing, economic conditions, regulatory changes, and historical performance. While these factors can be considered and potentially anticipated, certain judgments and assumptions are always required. As new information becomes available, these areas are reviewed and revised accordingly. For a discussion of the risk factors and uncertainties affecting Cenovus’s reserves data, see the section entitled Risk Management and Risk Factors in the Company’s annual 2023 MD&A, which section is incorporated by reference into this AIF and is available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
| Cenovus Energy Inc. – 2023 Annual Information Form | 29 |
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Other Oil and Gas Information
Oil and Gas Properties and Wells
The following tables summarizes producing and non-producing wells in which Cenovus has a working interest, as at December 31, 2023:
Producing Wells
| Crude Oil | Natural Gas | Total | ||||
|---|---|---|---|---|---|---|
| Gross | Net | Gross | Net | Gross | Net | |
| Canada | ||||||
| Oil Sands (1) | 3,380 | 3,272 | 412 | 393 | 3,792 | 3,665 |
| Conventional (2) | 706 | 532 | 4,036 | 3,075 | 4,742 | 3,607 |
| Offshore – Atlantic (3) | 37 | 17 | — | — | 37 | 17 |
| 4,123 | 3,821 | 4,448 | 3,468 | 8,571 | 7,289 | |
| International | ||||||
| Offshore – China (4) | — | — | 17 | 10 | 17 | 10 |
| Offshore – Indonesia (5) | — | — | 13 | 5 | 13 | 5 |
| — | — | 30 | 15 | 30 | 15 | |
| Total | 4,123 | 3,821 | 4,478 | 3,483 | 8,601 | 7,304 |
(1)Includes 2,230 gross producing wells (2,136 net producing wells) located in Alberta and 1,562 gross producing wells (1,529 net producing wells) located in Saskatchewan.
(2)Includes 4,256 gross producing wells (3,203 net producing wells) located in Alberta and 486 gross producing wells (404 net producing wells) located in British Columbia.
(3)All producing Offshore – Atlantic wells are located in Newfoundland and Labrador.
(4)All producing Offshore – China wells are located in South China Sea.
(5)All producing Offshore – Indonesia wells are located in the Madura Strait BD, MDA, MBH and MAC fields.
Non-Producing Wells (1)
| Crude Oil | Natural Gas | Total | ||||
|---|---|---|---|---|---|---|
| Gross | Net | Gross | Net | Gross | Net | |
| Canada | ||||||
| Oil Sands (2) | 6,029 | 5,761 | 668 | 606 | 6,697 | 6,367 |
| Conventional (3) | 548 | 424 | 1,365 | 1,069 | 1,913 | 1,493 |
| Offshore – Atlantic (4) | 4 | 2 | — | — | 4 | 2 |
| 6,581 | 6,187 | 2,033 | 1,675 | 8,614 | 7,862 | |
| International | ||||||
| Offshore – China | — | — | — | — | — | — |
| Offshore – Indonesia (5) | — | — | 1 | — | 1 | — |
| — | — | 1 | — | 1 | — | |
| Total | 6,581 | 6,187 | 2,034 | 1,675 | 8,615 | 7,862 |
(1)Non-producing wells include wells that are capable of producing, but which are currently not producing. Non-producing wells do not include other types of wells such as stratigraphic test wells, service wells or wells that have been abandoned.
(2)Includes 1,841 gross non-producing wells (1,698 net non-producing wells) located in Alberta and 4,856 gross non-producing wells (4,669 net non-producing wells) located in Saskatchewan.
(3)Includes 1,844 gross non-producing wells (1,445 net non-producing wells) located in Alberta; 59 gross non-producing wells (39 net non-producing wells) located in British Columbia; 10 gross non-producing wells (nine net non-producing wells) located in Saskatchewan.
(4)All non-producing Offshore – Atlantic wells are located in Newfoundland and Labrador.
(5)All non-producing Offshore – Indonesia wells are located in Madura Strait MDA field.
| Cenovus Energy Inc. – 2023 Annual Information Form | 30 |
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Exploration and Development Activity
The following tables summarize Cenovus’s gross and net interest in wells drilled in 2023:
| Offshore | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Oil Sands (1) | Conventional (1) | Atlantic (1) | China | Indonesia | Total (2) | |||||||
| Gross | Net | Gross | Net | Gross | Net | Gross | Net | Gross | Net | Gross | Net | |
| Crude Oil | 397 | 393 | 8 | 6 | — | — | — | — | — | — | 405 | 399 |
| Natural Gas | — | — | 38 | 32 | — | — | — | — | 1 | — | 39 | 32 |
| Total | 397 | 393 | 46 | 38 | — | — | — | — | 1 | — | 444 | 431 |
(1)Oil Sands, Conventional and Atlantic consist only of wells located in Canada.
(2)No exploration or service wells were drilled in 2023.
During the year ended December 31, 2023, the Company drilled 144 gross stratigraphic test wells (140 net wells) and 115 gross observation wells (115 net wells) in the Oil Sands segment. No stratigraphic test wells were drilled in the Conventional and Offshore segments.
The Company completed one gross development well in the Madura Strait area in 2023.
SAGD well pairs are counted as a single oil producing well in the table above. During the year ended December 31, 2023, 138 gross SAGD well pairs were drilled (138 net well pairs).
For all types of wells except stratigraphic test and observation wells, the calculation of the number of wells is based on the number of surface locations. For stratigraphic test and observation wells, the calculation is based on the number of bottomhole locations.
Development activities were focused on sustaining bitumen production at Foster Creek, Christina Lake, Sunrise and Lloydminster thermal, and the production and de-risking resource potential of the Conventional properties.
Properties With No Attributed Reserves
The following table summarizes Cenovus’s unproved acreage as at December 31, 2023:
| (thousands of acres) | Gross | Net |
|---|---|---|
| Canada | 8,721 | 7,260 |
| China | 1,925 | 1,441 |
| Indonesia | 1,384 | 554 |
| Total | 12,030 | 9,255 |
For lands in which Cenovus holds multiple leases under the same surface area, both gross areas and net areas have been counted for each lease.
Cenovus has rights to explore, develop, and exploit approximately 312,018 unproved net acres in Canada that could potentially expire by December 31, 2024, which relate entirely to Crown and freehold properties. There are no other expiries for China or Indonesia, except for Block DW-1 in Taiwan Area offshore.
The Company and CPC Corporation, through a joint agreement, have rights to an exploration block covering approximately 7,700 square kilometres located southwest of the Taiwan Area offshore. The three-dimensional seismic period expires on December 17, 2024. See Description of the Business Offshore section in this AIF for further details.
The Company has a liability of approximately $9 million related to exploration licenses in the Atlantic region. The Company has commitments totaling approximately $33 million related to exploration to be completed in China on timelines to be agreed with CNOOC. The Company has commitments totaling approximately $8 million related to Liman PSC in Indonesia.
Properties with no attributed reserves include Crown lands where bitumen contingent and prospective resources have been identified and Crown lands where exploration activities to date have not identified potential reserves in commercial quantities. The Company regularly reviews the economic viability of these unproved properties on the basis of product pricing, capital availability and level of related infrastructure development. From this process, some properties are selected for future development activity while others are retained as inactive, sold, swapped or relinquished back to the mineral rights owner.
| Cenovus Energy Inc. – 2023 Annual Information Form | 31 |
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Additional Information Concerning Abandonment and Reclamation Costs
The estimated total future abandonment and reclamation costs for surface and subsea existing wells, facilities, and infrastructure is based on management’s estimate of costs to remediate, reclaim and abandon wells and facilities having regard to Cenovus’s working interest and the estimated timing of the costs to be incurred in future periods. Cenovus has developed a process to calculate these estimates, which considers applicable regulations, actual and anticipated costs, type and size of the well or facility and the geographic location.
Cenovus has estimated undiscounted and uninflated future abandonment and reclamation costs for its existing upstream assets of approximately $6.5 billion (approximately $2.8 billion, discounted at 10 percent) at December 31, 2023, of which the Company expects to pay $0.8 billion in the next three years.
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 December 31, 2023, $211 million (December 31, 2022 – $209 million), was deposited in restricted accounts in the consolidated financial statements.
Of the undiscounted future abandonment and reclamation costs to be incurred over the life of Cenovus’s total proved reserves, approximately $11.8 billion has been deducted in estimating the FNR, which represents the Company’s total existing estimated abandonment and reclamation costs, plus all forecast estimates of abandonment and reclamation costs attributable to future development activity associated with the reserves.
Tax Outlook
Consistent with 2024 guidance dated December 13, 2023, and available on the Company’s website at cenovus.com, the Company expects to pay cash taxes of $1.3 billion to $1.6 billion in 2024. This estimate could vary significantly if underlying assumptions change with respect to commodity prices, capital spending levels, and acquisition and disposition transactions.
Costs Incurred
| ($ millions) | Canada | China | Indonesia (1) | 2023 |
|---|---|---|---|---|
| Acquisitions | ||||
| Unproved | 31 | — | — | 31 |
| Proved | 11 | — | — | 11 |
| Total Acquisitions | 42 | — | — | 42 |
| Exploration Costs | 80 | 4 | — | 84 |
| Development Costs | 3,389 | 3 | 14 | 3,406 |
| Total Costs Incurred | 3,511 | 7 | 14 | 3,532 |
| ($ millions) | Canada | China | Indonesia (1) | 2022 |
| --- | --- | --- | --- | --- |
| Acquisitions | ||||
| Unproved | — | — | — | — |
| Proved | 1,621 | — | — | 1,621 |
| Total Acquisitions | 1,621 | — | — | 1,621 |
| Exploration Costs | 34 | 3 | — | 37 |
| Development Costs | 2,404 | 4 | 74 | 2,482 |
| Total Costs Incurred | 4,059 | 7 | 74 | 4,140 |
(1)Includes Cenovus’s 40 percent interest in HCML.
Forward Contracts
Cenovus may use financial derivatives to manage its exposure to fluctuations in commodity prices, foreign exchange and interest rates. The Company may also enter into arrangements, such as renewable power contracts or power swaps, to manage exposure to future carbon compliance costs, power prices, energy costs associated with the production, transportation and refining of crude oil, or to offset select carbon emissions. A description of such instruments is provided in the notes to the Company’s consolidated financial statements for the year ended December 31, 2023.
| Cenovus Energy Inc. – 2023 Annual Information Form | 32 |
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Production Estimates
The following table summarizes the 2024 estimated gross production of Cenovus’s gross reserves for all properties held on December 31, 2023, using forecast prices and costs, which will be produced in Canada, China and Indonesia. These estimates assume certain activities take place, such as the development of undeveloped reserves, and that there are no divestitures.
| Total Proved | Total Proved Plus Probable | |
|---|---|---|
| Canada | ||
| Bitumen (Mbbls/d) (1) | 570.1 | 601.1 |
| Light and Medium Oil (Mbbls/d) | 17.7 | 18.6 |
| NGLs (Mbbls/d) | 19.8 | 21.4 |
| Conventional Natural Gas (MMcf/d) | 530.7 | 576.4 |
| Total (MBOE/d) | 696.0 | 737.1 |
| China | ||
| NGLs (Mbbls/d) | 7.6 | 8.3 |
| Conventional Natural Gas (MMcf/d) | 184.5 | 202.8 |
| Total (MBOE/d) | 38.4 | 42.1 |
| Indonesia | ||
| NGLs (Mbbls/d) | 2.3 | 2.5 |
| Conventional Natural Gas (MMcf/d) | 95.7 | 100.0 |
| Total (MBOE/d) | 18.2 | 19.1 |
| Total Company | ||
| Bitumen (Mbbls/d) (1) | 570.1 | 601.1 |
| Light and Medium Oil (Mbbls/d) | 17.7 | 18.6 |
| NGLs (Mbbls/d) | 29.6 | 32.2 |
| Conventional Natural Gas (MMcf/d) | 810.9 | 879.1 |
| Total (MBOE/d) | 752.6 | 798.4 |
(1)Includes Foster Creek production of 183.2 thousand barrels per day for total proved and 194.1 thousand barrels per day for total proved plus probable and Christina Lake production of 232.0 thousand barrels per day for total proved and 234.3 thousand barrels per day for total proved plus probable.
| Cenovus Energy Inc. – 2023 Annual Information Form | 33 |
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Production History and Per-Unit Results
| 2023 | Q4 | Q3 | Q2 | Q1 | |
|---|---|---|---|---|---|
| Canada | |||||
| Bitumen | |||||
| Foster Creek | 186.3 | 198.8 | 189.3 | 167.0 | 190.0 |
| Christina Lake | 237.4 | 239.6 | 237.6 | 234.9 | 237.2 |
| Sunrise | 48.9 | 50.1 | 54.5 | 46.5 | 44.5 |
| Lloydminster Thermal | 104.1 | 106.6 | 104.6 | 106.2 | 99.0 |
| Lloydminster Conventional Heavy Oil | 16.7 | 17.5 | 15.6 | 17.0 | 16.8 |
| Total Bitumen (Mbbls/d) | 593.4 | 612.6 | 601.6 | 571.6 | 587.5 |
| Light and Medium Oil (Mbbls/d) | 14.1 | 15.8 | 15.2 | 10.1 | 15.3 |
| NGLs (Mbbls/d) | 21.7 | 22.8 | 23.9 | 18.0 | 22.0 |
| Conventional Natural Gas (MMcf/d) | 566.0 | 581.9 | 592.7 | 504.3 | 584.9 |
| Total (MBOE/d) | 723.5 | 748.1 | 739.5 | 683.7 | 722.3 |
| China | |||||
| NGLs (Mbbls/d) | 8.8 | 9.5 | 10.0 | 6.2 | 9.5 |
| Conventional Natural Gas (MMcf/d) | 190.6 | 207.8 | 202.7 | 150.3 | 201.5 |
| Total (MBOE/d) | 40.5 | 44.2 | 43.8 | 31.2 | 43.0 |
| Indonesia | |||||
| NGLs (Mbbls/d) | 2.0 | 1.9 | 1.7 | 2.5 | 1.9 |
| Conventional Natural Gas (MMcf/d) | 76.0 | 86.6 | 72.0 | 74.8 | 70.6 |
| Total (MBOE/d) | 14.7 | 16.3 | 13.7 | 15.0 | 13.7 |
| Total Company | |||||
| Bitumen (Mbbls/d) | 593.4 | 612.6 | 601.6 | 571.6 | 587.5 |
| Light and Medium Oil (Mbbls/d) | 14.1 | 15.8 | 15.2 | 10.1 | 15.3 |
| NGLs (Mbbls/d) | 32.5 | 34.2 | 35.6 | 26.7 | 33.4 |
| Conventional Natural Gas (MMcf/d) | 832.6 | 876.3 | 867.4 | 729.4 | 857.0 |
| Total (MBOE/d) | 778.7 | 808.6 | 797.0 | 729.9 | 779.0 |
Netbacks
Netback per BOE is a non-GAAP ratio. Netback is a non-GAAP financial measure commonly used in the oil and gas industry to assist in measuring operating performance. Our Netback calculation is aligned with the definition found in the COGE 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, and exclude risk management activities. The sales price, transportation and blending expense, and sales volumes exclude the impact of purchased condensate. Condensate is blended with crude oil to transport it to market.
This measure has been described and presented in this AIF in order to provide shareholders and potential investors with additional information regarding Cenovus’s liquidity and its ability to generate funds to finance its operations, and to comply with the requirements of NI 51-101. This measure should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. For further information on these measures, readers should refer to the section entitled Specified Financial Measures Advisory located in the Company’s annual 2023 MD&A, which section is incorporated by reference into this AIF and is available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
| Cenovus Energy Inc. – 2023 Annual Information Form | 34 | |||
|---|---|---|---|---|
| Canada | Q4 | Q3 | Q2 | Q1 |
| --- | --- | --- | --- | --- |
| Foster Creek Bitumen (/bbl) | ||||
| Sales Price | 74.06 | 98.93 | 75.41 | 62.45 |
| Royalties | 19.89 | 20.65 | 13.71 | 11.44 |
| Transportation and Blending | 11.33 | 10.55 | 12.80 | 13.45 |
| Operating Expenses | 9.82 | 10.91 | 12.21 | 12.99 |
| Netback | 33.02 | 56.82 | 36.69 | 24.57 |
| Christina Lake Bitumen (/bbl) | ||||
| Sales Price | 65.95 | 91.72 | 66.39 | 49.83 |
| Royalties | 16.67 | 28.55 | 14.91 | 12.76 |
| Transportation and Blending | 7.36 | 5.76 | 5.91 | 7.70 |
| Operating Expenses | 7.59 | 9.32 | 8.09 | 9.11 |
| Netback | 34.33 | 48.09 | 37.48 | 20.26 |
| Sunrise Bitumen (/bbl) | ||||
| Sales Price | 76.55 | 96.67 | 70.93 | 50.44 |
| Royalties | 6.81 | 4.69 | 3.15 | 1.78 |
| Transportation and Blending | 12.41 | 12.29 | 12.58 | 12.67 |
| Operating Expenses | 13.92 | 15.94 | 17.38 | 22.03 |
| Netback | 43.41 | 63.75 | 37.82 | 13.96 |
| Total Bitumen (/bbl) | ||||
| Sales Price | 70.07 | 94.53 | 71.18 | 55.72 |
| Royalties | 15.03 | 19.70 | 11.78 | 9.94 |
| Transportation and Blending | 8.25 | 7.42 | 8.06 | 9.09 |
| Operating Expenses | 10.95 | 12.55 | 12.70 | 14.01 |
| Netback | 35.84 | 54.86 | 38.64 | 22.68 |
| Light and Medium Oil (/bbl) | ||||
| Sales Price | 113.62 | 106.85 | 116.67 | 104.35 |
| Royalties | 7.95 | 9.79 | 15.94 | 9.77 |
| Transportation and Blending | 6.17 | 3.20 | 21.10 | 4.13 |
| Operating Expenses | 40.13 | 42.03 | 97.36 | 46.19 |
| Netback (1) | 59.37 | 51.83 | (17.73) | 44.26 |
| Conventional Natural Gas (2) (/Mcf) | ||||
| Sales Price | 3.32 | 3.06 | 2.63 | 6.45 |
| Royalties | 0.12 | 0.12 | (0.28) | 0.32 |
| Transportation and Blending | 0.55 | 0.42 | 0.41 | 0.51 |
| Operating Expenses | 2.06 | 2.07 | 2.45 | 2.21 |
| Netback | 0.59 | 0.45 | 0.05 | 3.41 |
| NGLs (/bbl) | ||||
| Sales Price | 50.25 | 47.74 | 46.59 | 48.05 |
| Royalties | 4.88 | 4.79 | 8.23 | 13.39 |
| Transportation and Blending | 9.34 | 8.00 | 9.53 | 7.27 |
| Operating Expenses | 12.31 | 12.36 | 14.54 | 13.09 |
| Netback | 23.72 | 22.59 | 14.29 | 14.30 |
All values are in US Dollars.
(1)During the three months ended June 30, 2023, there were no sales volumes in the Atlantic.
(2)Includes natural gas volumes used for internal consumption by the Oil Sands segment.
| Cenovus Energy Inc. – 2023 Annual Information Form | 35 | |||
|---|---|---|---|---|
| China | Q4 | Q3 | Q2 | Q1 |
| --- | --- | --- | --- | --- |
| Conventional Natural Gas (/Mcf) | ||||
| Sales Price | 13.04 | 12.49 | 12.92 | 13.36 |
| Royalties | 0.71 | 0.66 | 0.68 | 0.72 |
| Transportation and Blending | — | — | — | — |
| Operating Expenses | 1.21 | 1.08 | 1.99 | 0.93 |
| Netback | 11.12 | 10.75 | 10.25 | 11.71 |
| NGLs (/bbl) | ||||
| Sales Price | 109.31 | 99.72 | 82.24 | 95.39 |
| Royalties | 18.59 | 13.14 | 4.71 | 5.54 |
| Transportation and Blending | — | — | — | — |
| Operating Expenses | 7.23 | 6.50 | 11.69 | 5.62 |
| Netback | 83.49 | 80.08 | 65.84 | 84.23 |
All values are in US Dollars.
| Indonesia | Q4 | Q3 | Q2 | Q1 |
|---|---|---|---|---|
| Conventional Natural Gas (/Mcf) | ||||
| Sales Price | 8.64 | 8.44 | 8.55 | 8.78 |
| Royalties | 0.83 | 0.82 | 1.07 | 2.00 |
| Transportation and Blending | — | — | — | — |
| Operating Expenses | 1.81 | 1.93 | 1.52 | 1.87 |
| Netback | 6.00 | 5.69 | 5.96 | 4.91 |
| NGLs (/bbl) | ||||
| Sales Price | 124.02 | 115.17 | 91.66 | 101.79 |
| Royalties | 64.60 | 58.53 | 49.17 | 57.48 |
| Transportation and Blending | — | — | — | — |
| Operating Expenses | 10.87 | 12.15 | 8.25 | 14.52 |
| Netback | 48.55 | 44.49 | 34.24 | 29.79 |
All values are in US Dollars.
| Cenovus Energy Inc. – 2023 Annual Information Form | 36 | |||
|---|---|---|---|---|
| Total Company | Q4 | Q3 | Q2 | Q1 |
| --- | --- | --- | --- | --- |
| Bitumen (/bbl) | ||||
| Sales Price | 70.07 | 94.53 | 71.18 | 55.72 |
| Royalties | 15.03 | 19.70 | 11.78 | 9.94 |
| Transportation and Blending | 8.25 | 7.42 | 8.06 | 9.09 |
| Operating Expenses | 10.95 | 12.55 | 12.70 | 14.01 |
| Netback | 35.84 | 54.86 | 38.64 | 22.68 |
| Light and Medium Oil (/bbl) | ||||
| Sales Price | 113.62 | 106.85 | 116.67 | 104.35 |
| Royalties | 7.95 | 9.79 | 15.94 | 9.77 |
| Transportation and Blending | 6.17 | 3.20 | 21.10 | 4.13 |
| Operating Expenses | 40.13 | 42.03 | 97.36 | 46.19 |
| Netback (1) | 59.37 | 51.83 | (17.73) | 44.26 |
| Conventional Natural Gas (2) (/Mcf) | ||||
| Sales Price | 6.18 | 5.73 | 5.37 | 8.27 |
| Royalties | 0.33 | 0.31 | 0.06 | 0.55 |
| Transportation and Blending | 0.36 | 0.29 | 0.28 | 0.35 |
| Operating Expenses | 1.83 | 1.83 | 2.26 | 1.88 |
| Netback | 3.66 | 3.30 | 2.77 | 5.49 |
| NGLs (/bbl) | ||||
| Sales Price | 70.76 | 65.61 | 59.12 | 64.54 |
| Royalties | 12.04 | 9.71 | 11.27 | 13.66 |
| Transportation and Blending | 6.23 | 5.36 | 6.42 | 4.79 |
| Operating Expenses | 10.82 | 10.70 | 13.28 | 11.05 |
| Netback | 41.67 | 39.84 | 28.15 | 35.04 |
All values are in US Dollars.
(1)During the three months ended June 30, 2023, there were no sales volumes in the Atlantic.
(2)Includes natural gas volumes used for internal consumption by the Oil Sands segment.
| Cenovus Energy Inc. – 2023 Annual Information Form | 37 |
|---|---|
| DIVIDENDS | |
| --- |
The declaration of dividends on common shares (base and variable) and preferred shares is at the sole discretion of the Board and is considered quarterly. The Board has the ability to declare common share dividends in common shares, cash or other property. If a dividend is not paid in full on any preferred shares on any dividend payment date, then a common share dividend restriction shall apply. The preferred share dividends are cumulative.
On February 14, 2024, the Company’s Board declared a first quarter base dividend of $0.140 per common share, payable on March 28, 2024, to common shareholders of record as at March 15, 2024.
On February 14, 2024, the Company’s Board declared first quarter dividends for Cenovus’s preferred shares, payable on April 1, 2024, in the amount of $9 million, to preferred shareholders of record as at March 15, 2024.
Cenovus declared and paid the following dividends on common shares over the last three years ended December 31:
| ($ per share) | 2023 | 2022 | 2021 |
|---|---|---|---|
| Base Dividends | 0.525 | 0.350 | 0.088 |
| Variable Dividends | — | 0.114 | — |
Cenovus declared the following dividends on the first preferred shares over the last three years ended December 31:
| ($ per share) | 2023 (1) | 2022 (2) | 2021 |
|---|---|---|---|
| Series 1 First Preferred Shares | 0.644 | 0.644 | 0.633 |
| Series 2 First Preferred Shares | 1.584 | 0.781 | 0.462 |
| Series 3 First Preferred Shares | 1.172 | 1.172 | 1.172 |
| Series 5 First Preferred Shares | 1.148 | 1.148 | 1.148 |
| Series 7 First Preferred Shares | 0.984 | 0.984 | 0.984 |
(1)The preferred shares dividends declared on November 1, 2023, were paid on January 2, 2024.
(2)The preferred shares dividends declared on November 1, 2022, were paid on January 3, 2023.
For additional information, readers should also refer to the section entitled Risk Management and Risk Factors and in particular the section entitled Risk Management and Risk Factors - Dividend Payment and Purchase of Securities in the Company’s annual 2023 MD&A, which section is incorporated by reference into this AIF and is available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
| DESCRIPTION OF CAPITAL STRUCTURE |
|---|
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 prior to issuance and subject to the Company’s articles. Cenovus has series 1, 2, 3, 4, 5, 6, 7 and 8 first preferred shares.
As at December 31, 2023, the Company had the following common shares, Cenovus Warrants and first preferred shares outstanding:
| Units Outstanding (thousands) | ||||
|---|---|---|---|---|
| Common Shares | 1,871,868 | |||
| Cenovus Warrants | 7,625 | |||
| Series 1 First Preferred Shares | 10,740 | |||
| Series 2 First Preferred Shares | 1,260 | |||
| Series 3 First Preferred Shares | 10,000 | |||
| Series 5 First Preferred Shares | 8,000 | |||
| Series 7 First Preferred Shares | 6,000 | Cenovus Energy Inc. – 2023 Annual Information Form | 38 | |
| --- | --- |
Common Shares
The holders of common shares are entitled to (i) receive dividends if, as and when declared by Cenovus’s Board, (ii) receive notice of, to attend, and to vote on the basis of one vote per common share held, at all meetings of shareholders, and (iii) participate in any distribution of the Company’s assets in the event of liquidation, dissolution or winding up or other distribution of its assets among its shareholders for the purpose of winding up its affairs.
Normal Course Issuer Bid
On November 7, 2023, the Company received approval from the TSX to renew the Company’s NCIB program to purchase up to 133.2 million common shares from November 9, 2023, to November 8, 2024.
For the year ended December 31, 2023, the Company purchased and cancelled 43.6 million common shares (December 31, 2022 – 112.5 million) through the NCIB. The shares were purchased at a volume weighted average price of $24.32 per common share (December 31, 2022 – $22.49) for a total of $1.1 billion (December 31, 2022 – $2.5 billion).
From January 1, 2024, to February 12, 2024, the Company purchased an additional 4.3 million common shares for $92 million. As at February 12, 2024, the Company can further purchase up to 118.3 million common shares under the NCIB.
Preferred Shares
Cenovus may issue preferred shares in one or more series. Cenovus’s Board may determine the designation, rights, privileges, restrictions and conditions attached to each series of preferred shares before the issue of such series. Holders of preferred shares are not entitled to vote at any meeting of shareholders but may be entitled to vote if the Company fails to pay dividends on that series of preferred shares. The first preferred shares are entitled to priority over the second preferred shares and the common shares with respect to the payment of dividends and the distribution of assets in the event of any liquidation, dissolution or winding up of Cenovus’s affairs. The aggregate number of preferred shares issued by the Company may not exceed 20 percent of the aggregate number of the then-outstanding common shares.
| As at December 31, 2023 | Dividend Reset Date | Dividend Rate<br><br>(percent) | Number of Preferred Shares (thousands) |
|---|---|---|---|
| Series 1 First Preferred Shares | March 31, 2026 | 2.58 | 10,740 |
| Series 2 First Preferred Shares (1) | Quarterly | 6.77 | 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 5.86 percent from December 31, 2022, to March 30, 2023 (December 31, 2021, to March 30, 2022 – 1.86 percent); 6.29 percent from March 31, 2023, to June 29, 2023 (March 31, 2022, to June 29, 2022 – 2.35 percent); 6.29 percent from June 30, 2023, to September 29, 2023 (June 30, 2022, to September 29, 2022 – 3.21 percent) and 6.89 percent from September 30, 2023, to December 30, 2023 (September 30, 2022, to December 30, 2022 – 5.05 percent).
Every five years, subject to certain conditions, the holders of first preferred shares will have the right, at their option, to convert their shares into a specified series of first preferred shares. On March 31, 2026, and on March 31 every five years thereafter, holders of series 1 and series 2 first preferred shares will have such option to convert their shares into the other series. On December 31, 2024, and on December 31 every five years thereafter, holders of series 3 and series 4 first preferred shares will have such option to convert their shares into the other series. On March 31, 2025, and on March 31 every five years thereafter, holders of series 5 and series 6 first preferred shares will have such option to convert their shares into the other series. On June 30, 2025, and on June 30 every five years thereafter, holders of series 7 and series 8 first preferred shares will have such option to convert their shares into the other series.
Each series of outstanding first preferred shares are entitled to receive a cumulative quarterly dividend, payable on the last day of March, June, September and December in each year, if, as and when declared by Cenovus’s Board of Directors. For the series 1, series 3, series 5 and series 7 first preferred shares, such dividend rate resets every five years at the rate equal to the sum of the five-year Government of Canada bond yield on the applicable calculation date plus 1.73 percent (series 1), 3.13 percent (series 3), 3.57 percent (series 5) and 3.52 percent (series 7). For the series 2, series 4, series 6 and series 8 first preferred shares, such dividend rate resets every quarter at the rate equal to the sum of the 90-day Government of Canada Treasury Bill yield on the applicable calculation date plus 1.73 percent (series 2), 3.13 percent (series 4), 3.57 percent (series 6) and 3.52 percent (series 8).
| Cenovus Energy Inc. – 2023 Annual Information Form | 39 |
|---|
Every five years, subject to certain conditions, on the applicable conversion date Cenovus may, at its option, redeem all or any number of the then-outstanding series of first preferred shares by payment of an amount in cash for each share to be redeemed equal to $25.00. In addition, subject to certain conditions, on any other date Cenovus may, at its option, redeem all or any number of the then-outstanding series 2, series 4, series 6 and series 8 first preferred shares, by payment of an amount in cash for each share to be redeemed equal to $25.50. In each case, such payment shall also include all accrued and unpaid dividends thereon to but excluding the date fixed for redemption (less any tax or other amount required to be deducted and withheld).
Second Preferred Shares
There were no second preferred shares outstanding as at December 31, 2023.
Cenovus Warrants
The Cenovus Warrants were created and issued pursuant to the terms of the warrant indenture dated January 1, 2021 (the “Warrant Indenture”) between Cenovus and Computershare Trust Company of Canada, as warrant agent.
Each whole Cenovus Warrant is exercisable for one common share at any time up to 4:30 pm (MST) on January 1, 2026, with an exercise price of $6.54 per common share, subject to adjustment in accordance with the terms of the Warrant Indenture. Cenovus Warrants do not have voting or any other rights of common shares. A copy of the Warrant Indenture is filed and available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
On June 14, 2023, Cenovus purchased and cancelled 45.5 million Cenovus Warrants. The price for each Cenovus Warrant purchased represented a price of $22.18 per common share, less the warrant exercise price of $6.54 per common share, for a total of $711 million. The purchased warrants were paid in full by December 31, 2023.
Shareholder Rights Plan
Cenovus has a shareholder rights plan (the “Shareholder Rights Plan”) which was adopted in 2009 and creates a right that attaches to each issued common share. Until the separation time, which typically occurs at the time of an unsolicited take-over bid, whereby a person acquires or attempts to acquire 20 percent or more of Cenovus’s common shares, the rights are not separable from the common shares, are not exercisable and no separate rights certificates are issued. Each right entitles the holder, other than the 20 percent acquiror, from and after the separation time (unless delayed by Cenovus’s Board) and before certain expiration times, to acquire common shares at 50 percent of the market price at the time of exercise. In connection with the Arrangement, the Company’s shareholders approved certain amendments to the Shareholder Rights Plan to ensure that an acquisition by any person of common shares or of rights to acquire common shares pursuant to (i) the Arrangement, (ii) the Cenovus Warrants, including the exercise thereof, or (iii) any exercise of pre-emptive rights, including pursuant to any follow-on offering, under any Arrangement Pre-Emptive Rights Agreement (as defined below in the Material Contracts section of this AIF) does not and will not result in the occurrence of a “Flip-In Event” or the “Separation Time” (as those terms are defined in the Shareholder Rights Plan). The Shareholder Rights Plan was amended and reconfirmed at the 2021 annual meeting of shareholders and must be reconfirmed by the Company’s shareholders every three years. Shareholders will be asked to reconfirm, and if applicable, approve certain amendments to the Shareholder Rights Plan at the 2024 annual meeting of shareholders. If the Shareholder Rights Plan is not reconfirmed by Cenovus shareholders every three years, the Shareholder Rights Plan will terminate. A copy of the Shareholder Rights Plan was filed on SEDAR+ on May 12, 2021, and is available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
Dividend Reinvestment Plan
Cenovus has a dividend reinvestment plan which permits holders of common shares to automatically reinvest all or any portion of the cash dividends paid on their common shares in additional common shares. At the discretion of the Company, the additional common shares may be issued from treasury at the volume weighted average price of the common shares (denominated in the currency in which the common shares trade on the applicable stock exchange) traded on the TSX during the last five trading days preceding the relevant dividend payment date or purchased on the market.
Credit Ratings
The following information relating to Cenovus’s credit ratings is provided as it relates to the Company’s financing costs and liquidity. Specifically, credit ratings affect Cenovus’s ability to obtain short-term and long-term financing and the cost of such financing. A reduction in the current rating on Cenovus’s debt by the Company’s rating agencies or a negative change in its ratings outlook could adversely affect Cenovus’s cost of financing, its access to sources of liquidity and capital, and potentially obligate it to post incremental collateral in the form of cash, letters of credit or other financial instruments. See the section entitled Risk Management and Risk Factors in the Company’s annual 2023 MD&A, which section is incorporated by reference into this AIF and is available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
| Cenovus Energy Inc. – 2023 Annual Information Form | 40 |
|---|
The following table outlines the current ratings and outlooks of Cenovus’s debt and first preferred shares:
| S&P Global<br><br>Ratings<br><br>(“S&P”) | Moody’s<br><br>Investors Service<br><br>(“Moody’s”) | Morningstar<br><br>DBRS<br><br>(“DBRS”) | Fitch<br><br>Ratings Inc.<br><br>(“Fitch”) | |
|---|---|---|---|---|
| Senior Unsecured Long-Term Notes | BBB- | Baa2 | BBB (high) | BBB |
| Outlook/Trend | Positive | Positive | Stable | Stable |
| Series 1 First Preferred Shares | P-3 | — | Pfd-3 (high) | — |
| Series 2 First Preferred Shares | P-3 | — | Pfd-3 (high) | — |
| Series 3 First Preferred Shares | P-3 | — | Pfd-3 (high) | — |
| Series 5 First Preferred Shares | P-3 | — | Pfd-3 (high) | — |
| Series 7 First Preferred Shares | P-3 | — | Pfd-3 (high) | — |
Credit ratings are intended to provide an independent measure of the credit quality of an issue of securities. The credit ratings assigned by the rating agencies are not recommendations to purchase, hold or sell the securities nor do the ratings comment on market price or suitability for a particular investor. A rating may not remain in effect for any given period of time and may be revised or withdrawn entirely by a rating agency at any time in the future if, in its judgment, circumstances so warrant.
S&P’s long-term credit ratings are on a rating scale that ranges from AAA to D, which represents the range from highest to lowest quality of such securities rated. A rating of BBB- by S&P is within the fourth highest of 10 categories and indicates that the obligation exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the obligation. Ratings from AA to CCC may be modified by the addition of a “+” or a “-”. The addition of a “+” or “-” designation after a rating indicates the relative standing within the major rating categories. An S&P rating outlook assesses the potential direction of a long-term credit rating over the intermediate term, which is generally up to two years for investment grade and generally up to one year for speculative grade. Rating outlooks fall into four categories – “Positive”, “Negative”, “Stable” and “Developing”. In determining a rating outlook, consideration is given to any changes in the economic and/or fundamental business conditions. A “Positive” outlook indicates that a rating may be raised.
S&P’s preferred share ratings are a forward-looking opinion about the creditworthiness of an obligor with respect to a specific preferred share obligation issued in the Canadian market relative to preferred shares issued by other issuers in the Canadian market. The opinion reflects S&P’s view of the issuer’s capacity and willingness to meet its financial commitments as they come due. There is a direct correspondence between the specific ratings assigned on the Canadian preferred share scale and the various rating levels on the global debt rating scale of S&P. According to S&P’s ratings system, a P-3 rating on the Canadian preferred share rating scale is equivalent to a BB rating on the long-term credit rating scale. A rating of BB by S&P is within the fifth highest of 10 categories and indicates that the obligation is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor’s inadequate capacity to meet its financial commitments on the obligation.
Moody’s long-term credit ratings are on a rating scale that ranges from Aaa to C, which represents the range from highest to lowest quality of such securities rated. A rating of Baa2 by Moody’s is within the fourth highest of nine categories and is assigned to debt securities which are considered to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics. The addition of a 1, 2 or 3 modifier after a rating indicates the relative standing within a particular rating category. The modifier 2 indicates that the issue ranks in the mid-range end of its generic rating category. A Moody’s rating outlook is an opinion regarding the likely rating direction over the medium term. Rating outlooks fall into four categories – “Positive”, “Negative”, “Stable”, and “Developing”. A Positive outlook indicates a higher likelihood of a rating change over the medium term.
DBRS’s long-term credit ratings are on a rating scale that ranges from AAA to D, which represents the range from highest to lowest quality of such securities rated. A rating of BBB (high) by DBRS is within the fourth highest of 10 categories and is assigned to debt securities considered to be of adequate credit quality, with acceptable capacity for payment of financial obligations. Entities in the BBB (high) category are of adequate credit quality; however, may be vulnerable to future events. The assignment of a “(high)” or “(low)” modifier within each rating category indicates relative standing within such category. The assignment of a “(high)” modifier indicates the rating is in the high end of the category. Rating trends provide guidance in respect of DBRS’s opinion regarding the outlook for the rating in question, with rating trends falling into one of three categories “Positive”, “Stable” or “Negative”. The rating trend indicates the direction in which DBRS considers the rating is headed should present circumstances continue, or in some cases, unless challenges are addressed by the issuer.
| Cenovus Energy Inc. – 2023 Annual Information Form | 41 |
|---|
DBRS’s preferred share ratings reflect an opinion on the risk that an issuer will not fulfill its full obligations, with respect to both dividend and principal commitments in respect of preferred shares issued in the Canadian securities market in accordance with the terms under which the relevant preferred shares have been issued. DBRS’s preferred share ratings range from Pfd-1 (highest) to D (lowest). According to DBRS’s ratings system, preferred shares rated Pfd-3 (high) are generally of adequate credit quality. While protection of dividends and principal is still considered acceptable, the issuing entity is more susceptible to adverse changes in financial and economic conditions, and there may be other adverse conditions present which detract from debt protection. Pfd-3 (high) ratings generally correspond with issuers with a BBB category or higher reference point.
Fitch’s long-term credit ratings are on a rating scale that ranges from AAA to BBB (investment grade) and BB to D (speculative grade), which represents the range from highest to lowest quality of such securities rated. The terms "investment grade" and "speculative grade" are market conventions and do not imply any recommendation or endorsement of a specific security for investment purposes. A rating of BBB is within the fourth highest of 11 categories and indicates that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity. The modifiers “+” or ”-” may be appended to a rating to denote relative status within major rating categories. A Fitch rating outlook indicates the direction a rating is likely to move over a one to two-year period, with rating outlooks falling into four categories: “Positive”, “Negative”, “Stable” or “Evolving”. Rating outlooks reflect financial or other trends that have not yet reached, or have not been sustained at, a level that would trigger a rating action, but which may do so if such trends continue. Positive or Negative outlooks do not imply that a rating change is inevitable and similarly, ratings with Stable outlooks can be raised or lowered without prior revision of the outlook. Where the fundamental trend has strong, conflicting elements of both positive and negative, the rating outlook may be described as Evolving. A Stable Rating Outlook indicates a low likelihood of rating change over a one- to two-year period.
Throughout the last two years, Cenovus has made payments to each of S&P, Moody’s, DBRS and Fitch related to the rating of the Company’s debt. Additionally, Cenovus has purchased products and services from S&P, Moody’s, DBRS and Fitch over the same time period.
| MARKET FOR SECURITIES |
|---|
All of the outstanding Cenovus common shares are listed and posted for trading on the TSX and the NYSE under the symbol CVE. The following table outlines the share price trading range and volume of shares traded by month in 2023:
| TSX | NYSE | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Price Range ( per share) | Volume (1) (thousands) | Price Range (US per share) | Volume (2) (thousands) | ||||||
| High | Close | High | Close | ||||||
| January | 28.00 | 26.58 | 196,994 | 21.03 | 17.80 | 19.98 | 136,968 | ||
| February | 26.97 | 25.16 | 192,436 | 20.21 | 17.58 | 18.44 | 131,897 | ||
| March | 26.47 | 23.58 | 286,440 | 19.49 | 14.98 | 17.46 | 180,824 | ||
| April | 25.83 | 22.74 | 228,536 | 19.22 | 15.98 | 16.80 | 175,537 | ||
| May | 23.12 | 21.69 | 191,242 | 17.01 | 14.98 | 15.98 | 148,969 | ||
| June | 24.19 | 22.50 | 179,636 | 18.11 | 15.90 | 16.98 | 142,433 | ||
| July | 25.64 | 25.08 | 189,342 | 19.47 | 16.55 | 19.02 | 141,627 | ||
| August | 27.17 | 26.94 | 209,397 | 20.08 | 18.30 | 19.93 | 167,266 | ||
| September | 28.62 | 28.28 | 177,079 | 21.24 | 19.68 | 20.82 | 151,109 | ||
| October | 29.18 | 26.42 | 162,252 | 21.37 | 18.93 | 19.08 | 160,994 | ||
| November | 27.01 | 24.07 | 216,540 | 19.74 | 17.05 | 17.76 | 190,591 | ||
| December | 24.42 | 22.08 | 232,377 | 18.09 | 15.56 | 16.65 | 230,074 |
All values are in US Dollars.
(1)As reported by all Canadian marketplaces. Source: Bloomberg.
(2)As reported by all U.S. marketplaces. Source: Bloomberg.
The Cenovus Warrants are listed and trade on the TSX under the symbol CVE.WT and on the NYSE under the symbol CVE.WS and the Series 1 First Preferred Shares, Series 2 First Preferred Shares, Series 3 First Preferred Shares, Series 5 First Preferred Shares and Series 7 First Preferred Shares are listed and trade on the TSX under the symbols CVE.PR.A, CVE.PR.B, CVE.PR.C, CVE.PR.E and CVE.PR.G, respectively.
| Cenovus Energy Inc. – 2023 Annual Information Form | 42 |
|---|
The share price trading range and volume of the Cenovus Warrants traded on the TSX and the NYSE in 2023 are provided below:
| TSX | NYSE | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Price Range ( per share) | Volume (1) (thousands) | Price Range (US per share) | Volume (2) (thousands) | ||||||
| High | Close | High | Close | ||||||
| January | 21.39 | 20.08 | 394 | 15.96 | 13.00 | 15.08 | 48 | ||
| February | 20.40 | 18.60 | 292 | 15.25 | 13.00 | 13.60 | 78 | ||
| March | 19.88 | 17.11 | 442 | 14.58 | 10.56 | 12.42 | 50 | ||
| April | 19.28 | 16.20 | 413 | 14.36 | 11.40 | 12.07 | 116 | ||
| May | 16.50 | 15.25 | 214 | 12.12 | 10.40 | 11.01 | 18 | ||
| June | 17.50 | 16.05 | 185 | 13.20 | 11.12 | 12.20 | 42 | ||
| July | 19.00 | 18.62 | 240 | 14.35 | 12.08 | 14.12 | 34 | ||
| August | 20.52 | 20.40 | 426 | 15.13 | 13.35 | 14.03 | 63 | ||
| September | 22.09 | 21.72 | 374 | 16.20 | 14.32 | 16.05 | 106 | ||
| October | 22.63 | 19.86 | 248 | 16.53 | 14.28 | 14.36 | 95 | ||
| November | 20.35 | 17.54 | 185 | 14.72 | 12.50 | 12.88 | 49 | ||
| December | 18.00 | 15.49 | 208 | 12.74 | 10.82 | 11.75 | 36 |
All values are in US Dollars.
(1)As reported by all Canadian marketplaces. Source: Bloomberg.
(2)As reported by all U.S. marketplaces. Source: Bloomberg.
The share price trading range and volume of the Series 1 First Preferred Shares traded on the TSX in 2023 are provided below:
| Price Range ( per share) | Volume (1) (thousands) | ||
|---|---|---|---|
| High | Close | ||
| January | 15.81 | 15.29 | 78 |
| February | 15.67 | 15.07 | 67 |
| March | 15.24 | 13.80 | 132 |
| April | 14.82 | 14.00 | 53 |
| May | 14.35 | 12.60 | 71 |
| June | 13.95 | 13.28 | 56 |
| July | 13.46 | 12.50 | 1,233 |
| August | 12.49 | 12.25 | 86 |
| September | 12.54 | 11.83 | 131 |
| October | 12.80 | 12.79 | 120 |
| November | 13.57 | 13.55 | 92 |
| December | 14.00 | 13.94 | 59 |
All values are in US Dollars.
(1)As reported by all Canadian marketplaces. Source: Bloomberg.
The share price trading range and volume of the Series 2 First Preferred Shares traded on the TSX in 2023 are provided below:
| Price Range ( per share) | Volume (1) (thousands) | ||
|---|---|---|---|
| High | Close | ||
| January | 16.50 | 16.40 | 6 |
| February | 16.98 | 16.75 | 5 |
| March | 17.00 | 15.70 | 27 |
| April | 16.74 | 16.50 | 6 |
| May | 16.50 | 15.50 | 16 |
| June | 16.00 | 15.30 | 10 |
| July | 15.77 | 15.05 | 39 |
| August | 15.70 | 14.75 | 15 |
| September | 15.20 | 15.20 | 15 |
| October | 15.20 | 14.61 | 29 |
| November | 15.09 | 15.00 | 46 |
| December | 15.10 | 14.87 | 61 |
All values are in US Dollars.
(1)As reported by all Canadian marketplaces. Source: Bloomberg.
| Cenovus Energy Inc. – 2023 Annual Information Form | 43 |
|---|
The share price trading range and volume of the Series 3 First Preferred Shares traded on the TSX in 2023 are provided below:
| Price Range ( per share) | Volume (1) (thousands) | ||
|---|---|---|---|
| High | Close | ||
| January | 20.95 | 20.55 | 115 |
| February | 21.23 | 20.83 | 91 |
| March | 21.03 | 19.53 | 79 |
| April | 19.90 | 19.30 | 97 |
| May | 19.19 | 18.00 | 81 |
| June | 19.40 | 18.45 | 46 |
| July | 19.39 | 18.89 | 156 |
| August | 18.96 | 17.80 | 91 |
| September | 19.45 | 19.25 | 154 |
| October | 19.45 | 19.05 | 147 |
| November | 21.49 | 20.99 | 443 |
| December | 22.21 | 22.21 | 128 |
All values are in US Dollars.
(1)As reported by all Canadian marketplaces. Source: Bloomberg.
The share price trading range and volume of the Series 5 First Preferred Shares traded on the TSX in 2023 are provided below:
| Price Range ( per share) | Volume (1) (thousands) | ||
|---|---|---|---|
| High | Close | ||
| January | 22.10 | 22.06 | 50 |
| February | 22.15 | 21.47 | 73 |
| March | 21.78 | 20.08 | 42 |
| April | 21.55 | 20.55 | 48 |
| May | 20.59 | 19.74 | 45 |
| June | 19.70 | 19.19 | 154 |
| July | 20.01 | 19.99 | 104 |
| August | 19.97 | 18.73 | 113 |
| September | 19.25 | 19.25 | 202 |
| October | 19.20 | 18.65 | 119 |
| November | 22.08 | 22.00 | 208 |
| December | 22.78 | 22.72 | 186 |
All values are in US Dollars.
(1)As reported by all Canadian marketplaces. Source: Bloomberg.
The share price trading range and volume of the Series 7 First Preferred Shares traded on the TSX in 2023 are provided below:
| Price Range ( per share) | Volume (1) (thousands) | ||
|---|---|---|---|
| High | Close | ||
| January | 21.34 | 20.85 | 34 |
| February | 21.76 | 21.01 | 86 |
| March | 21.50 | 19.98 | 76 |
| April | 20.59 | 20.00 | 33 |
| May | 20.24 | 18.80 | 82 |
| June | 20.00 | 18.85 | 278 |
| July | 20.08 | 20.00 | 333 |
| August | 20.00 | 18.50 | 111 |
| September | 18.81 | 18.81 | 46 |
| October | 19.24 | 18.58 | 89 |
| November | 21.39 | 21.30 | 166 |
| December | 22.25 | 22.25 | 208 |
All values are in US Dollars.
(1)As reported by all Canadian marketplaces. Source: Bloomberg.
| Cenovus Energy Inc. – 2023 Annual Information Form | 44 |
|---|---|
| DIRECTORS AND EXECUTIVE OFFICERS | |
| --- |
Directors
The term of each director is from the effective date of their election or appointment until the end of the next annual general meeting or until a successor is duly elected or appointed. The following individuals are the directors of Cenovus:
| Name and Residence | Date Elected or Appointed as Director, Independence Status and Committee Membership | Principal Occupation During the Past Five Years | |||
|---|---|---|---|---|---|
| Keith M. Casey<br><br>San Antonio, Texas<br><br>United States | April 29, 2020<br><br>Independent<br><br>HRC (1)<br><br>SSR (2) | Mr. Casey is the Chief Executive Officer of Pin Oak Group, LLC, a private midstream company, since February 2022. Mr. Casey served as Chief Executive Officer of Tatanka Midstream LLC, a private midstream company, from March 2020 to January 2022. Mr. Casey served as Executive Vice-President Commercial and Value Chain, from August 2016 to October 2018; and Executive Vice-President, Operations from May 2014 to August 2016 with Andeavor Corporation, formerly known as Tesoro Corporation, an integrated petroleum refining, logistics, and marketing company. | |||
| Michael J. Crothers<br><br>Calgary, Alberta<br><br>Canada | November 1, 2023<br><br>Independent<br><br>Governance<br><br>HRC (1) | Mr. Crothers is a Director of Keyera Corp., a publicly traded integrated energy infrastructure company, since June 2021. Mr. Crothers served as President and Country Chair for Shell Canada Limited, a public global energy and petrochemical company, from December 2015 to May 2021; and as Vice President Canada Integrated Gas from December 2017 to May 2021. Mr. Crothers also serves as Chair of the Board of Directors of Northern RNA, a private life sciences company, since April 2021, and as a Director of Convrg Innovations Inc., formerly Westgen Technologies, a private clean tech company, since August 2022. | |||
| James D. Girgulis<br><br>Luxembourg<br><br>Grand-Duchy of Luxembourg | November 1, 2023<br>Non-Independent<br>Governance | Mr. Girgulis is Managing Director of Hutchison Whampoa Europe Investments S.à r.l., a private investment company, and Managing Director of CK Hutchison Group Telecom Finance S.A., a public limited company, both since January 2023. From April 2022 to January 2023, Mr. Girgulis was Managing Director of CK Hutchison Networks Europe Investments S.à r.l., a private investment company. From April 2021 to March 2022, Mr. Girgulis was Special Advisor to the Executive at Cenovus following Cenovus's combination with Husky in January 2021. Mr. Girgulis was Senior Vice-President, General Counsel & Secretary of Husky, a public integrated energy company, from April 2012 to March 2021. | |||
| Jane E. Kinney<br><br>Toronto, Ontario<br><br>Canada | April 24, 2019<br><br>Independent<br><br>Audit<br><br>SSR (2) | Ms. Kinney is a director of Intact Financial Corporation, a publicly traded insurance company, since May 2019; and a director and Chair of Nautilus Indemnity Holdings Limited, a private insurance company, since February and July 2021, respectively. Ms. Kinney was appointed Vice Chair, Leadership Team Member of Deloitte LLP Canada (“Deloitte”), an audit and consulting firm, in June 2010 and served in this role until her retirement in June 2019. | |||
| Harold N. Kvisle<br><br>Calgary, Alberta<br><br>Canada | April 25, 2018<br><br>Independent<br><br>Governance<br><br>HRC (1) | Mr. Kvisle is a director, since May 2009, and Chairman, since January 2016, of ARC Resources Ltd., a publicly traded oil and gas company. Mr. Kvisle has been Board Chair, since January 2019, of Finning International Inc., a publicly traded heavy equipment company. Mr. Kvisle served as a director of Cona Resources Ltd. (“Cona”), a publicly traded heavy oil company, from November 2011 to May 2018 when Cona was acquired by Waterous Energy Fund. | |||
| Eva L. Kwok<br><br>Vancouver, British Columbia Canada | January 1, 2021<br><br>Independent<br><br>Governance | Mrs. Kwok is Chair, a director and Chief Executive Officer of Amara Holdings Inc., a private investment holding company, since November 2010. Mrs. Kwok is also a director of CK Life Sciences Int’l., (Holdings) Inc., a publicly traded nutraceutical, pharmaceutical and agriculture-related company, since June 2002; CK Infrastructure Holdings Limited, a publicly traded global infrastructure investment and development company, since September 2004; CK Asset Holdings Limited, a publicly traded global property investment, development, management and utility infrastructure company, since May 2022; and was a director of Husky, from August 2000 until March 2021, prior to Husky’s amalgamation with Cenovus. | Cenovus Energy Inc. – 2023 Annual Information Form | 45 | |
| --- | --- | ||||
| Name and Residence | Date Elected or Appointed as Director, Independence Status and Committee Membership | Principal Occupation During the Past Five Years | |||
| --- | --- | --- | |||
| Melanie A. Little<br><br>Alpharetta, Georgia<br><br>United States | January 1, 2023<br><br>Independent<br><br>HRC (1)<br><br>SSR (2) | Ms. Little is the President and Chief Executive Officer of Colonial Pipeline Company, a privately owned refined products terminaling and pipeline company, since January 2023. Ms. Little served as Executive Vice-President and Chief Operating Officer of Magellan Midstream Partners, L.P. (“Magellan”), a public partnership that transports, stores and distributes petroleum products acquired by ONEOK in September 2023, from June 2022 to January 2023, and as Senior Vice-President, Operations and Environmental, Health, Safety and Security of Magellan, from July 2017 to May 2022. Ms. Little served as a director of Diversified Energy Company plc, a public oil and gas producer, from December 2019 to December 2022. | |||
| Richard J. Marcogliese Alamo, California<br><br>United States | April 27, 2016<br><br>Independent<br><br>Audit<br><br>SSR (2) | Mr. Marcogliese is the Principal of iRefine, LLC, a privately owned petroleum refining consulting company, since June 2011; and a director of Delek US Holdings, Inc., a publicly traded downstream energy company, since January 2020. Mr. Marcogliese served as Executive Advisor of Pilko & Associates L.P., a private chemical and energy advisory company, from June 2011 to December 2019. | |||
| Jonathan M. McKenzie<br><br>Calgary, Alberta<br>Canada | April 26, 2023<br><br>Non-Independent (3) | Mr. McKenzie was appointed President & Chief Executive Officer of Cenovus effective April 26, 2023. From January 2021 to April 2023, Mr. McKenzie was Executive Vice-President & Chief Operating Officer of Cenovus; and from May 2018 to January 2021, Mr. McKenzie was Executive Vice-President and Chief Financial Officer of Cenovus. | |||
| Claude Mongeau<br><br>Montreal, Quebec<br>Canada | December 1, 2016<br><br>Independent<br><br>Audit<br><br>Governance | Mr. Mongeau was appointed Lead Independent Director of Cenovus effective April 26, 2023. Mr. Mongeau is a director of The Toronto-Dominion Bank, an international financial institution, since March 2015; and a director of Norfolk Southern Corporation, a publicly traded North American rail transportation provider, since September 2019. Mr. Mongeau served as a director of TELUS Corporation, a publicly traded telecommunications company, from May 2017 to August 2019. | |||
| Alexander J. Pourbaix<br><br>Calgary, Alberta<br><br>Canada | November 6, 2017<br><br>Non-Independent (3) | Mr. Pourbaix was appointed Executive Chair of the Board of Cenovus effective April 26, 2023. Mr. Pourbaix served as President & Chief Executive Officer of Cenovus from November 2017 to April 2023; and is a director of NRG Energy, Inc., a publicly traded energy and home services company, since November 2023; and Canadian Utilities Limited, a publicly traded diversified global energy infrastructure corporation, since November 2019. Mr. Pourbaix served as a director of Trican Well Service Ltd., a publicly traded oilfield services provider, from May 2012 to December 2019. | |||
| Wayne E. Shaw<br><br>Toronto, Ontario<br>Canada | January 1, 2021<br><br>Independent<br><br>Audit<br><br>SSR (2) | Mr. Shaw is the President of G.E. Shaw Investments Limited, a private investment holding company, since 2012. Prior to his retirement in April 2013, he was a Senior Partner with Stikeman Elliott LLP, Barristers and Solicitors, Toronto, Ontario. Mr. Shaw was a director of Husky, from August 2000 until March 2021, prior to Husky’s amalgamation with Cenovus. | |||
| Frank J. Sixt<br><br>Hong Kong Special<br><br>Administrative Region | January 1, 2021<br><br>Independent<br><br>Governance | Mr. Sixt is an Executive Director, Group Finance Director and Deputy Managing Director of CK Hutchison Holdings Limited, a publicly traded ports and related services, retail, infrastructure and telecommunications company. Mr. Sixt is also the Non-Executive Chairman of TOM Group Limited, a publicly traded technology and media company; an Executive Director of CK Infrastructure Holdings Limited, a publicly traded global infrastructure investment and development company; a Non-Executive Director of TPG Telecom Limited and Chairman of Hutchison Telecommunications (Australia) Limited, both publicly traded telecommunications service provider companies; and an Alternate Director to a Director of HK Electric Investments Manager Limited as the trustee-manager of HK Electric Investments, manager of a publicly traded power industry focused trust and of HK Electric Investments Limited, a publicly traded power industry focused trust. Mr. Sixt was a Commissioner of PT Indosat Tbk, a publicly traded telecommunications service provider. Mr. Sixt is a Director of the Li Ka Shing (Canada) Foundation, the Li Ka Shing Foundation Limited and he was a director of Husky, from August 2000 until March 2021, prior to Husky’s amalgamation with Cenovus. | Cenovus Energy Inc. – 2023 Annual Information Form | 46 | |
| --- | --- | ||||
| Name and Residence | Date Elected or Appointed as Director, Independence Status and Committee Membership | Principal Occupation During the Past Five Years | |||
| --- | --- | --- | |||
| Rhonda I. Zygocki<br><br>Friday Harbor, Washington<br>United States | April 27, 2016<br><br>Independent<br><br>Governance<br><br>HRC (1) | Ms. Zygocki served as Executive Vice President, Policy and Planning of Chevron Corporation (“Chevron”), a publicly traded integrated energy company, from March 2011 until her retirement in February 2015 and prior thereto, during her 34 years with Chevron, she held a number of senior management and executive leadership positions in international operations, public affairs, strategic planning, policy, government affairs and health, environment and safety. |
(1)Human Resources and Compensation Committee (“HRC”).
(2)Safety, Sustainability and Reserves Committee (“SSR”).
(3)As officers and non-independent directors, Messrs. McKenzie and Pourbaix are not members of any of the committees of Cenovus’s Board.
Executive Officers
The following individuals are the executive officers of Cenovus:
| Name and Residence | Office Held and Principal Occupation During the Past Five Years | |||
|---|---|---|---|---|
| Alexander J. Pourbaix<br><br>Calgary, Alberta<br><br>Canada | Executive Chair of the Board<br><br>Mr. Pourbaix’s biographical information is included under “Directors”. | |||
| Jonathan M. McKenzie<br><br>Calgary, Alberta<br><br>Canada | President & Chief Executive Officer<br><br>Mr. McKenzie’s biographical information is included under “Directors”. | |||
| Karamjit S. Sandhar<br><br>Calgary, Alberta<br><br>Canada | Executive Vice-President & Chief Financial Officer<br><br>Mr. Sandhar was appointed Executive Vice-President & Chief Financial Officer, effective September 1, 2023. From January 2021 to August 2023, Mr. Sandhar was Executive Vice-President, Strategy & Corporate Development; from January 2020 to January 2021, Mr. Sandhar was Senior Vice-President, Conventional; and Senior Vice-President, Deep Basin prior to the Deep Basin segment being renamed the Conventional segment in the first quarter of 2020. From December 2017 to December 2019, Mr. Sandhar was Senior Vice-President, Strategy & Corporate Development. | |||
| Keith A. Chiasson<br><br>Calgary, Alberta<br><br>Canada | Executive Vice-President & Chief Operating Officer<br><br>Mr. Chiasson was appointed Executive Vice-President & Chief Operating Officer effective September 1, 2023. From March 2019 to August 2023, Mr. Chiasson was Executive Vice-President, Downstream; from December 2017 to February 2019, Mr. Chiasson was Senior Vice-President, Downstream; from May 2017 to December 2017, Mr. Chiasson was Vice-President, Oil Sands Production Operations; and from July 2016 to May 2017, Mr. Chiasson was Vice-President, Operations. | |||
| Rhona M. DelFrari<br><br>Calgary, Alberta<br><br>Canada | Chief Sustainability Officer & Executive Vice-President, Stakeholder Engagement<br><br>Ms. DelFrari was appointed Chief Sustainability Officer & Executive Vice-President, Stakeholder Engagement effective March 1, 2023. From January 2021 to February 2023, Ms. DelFrari was Chief Sustainability Officer & Senior Vice-President, Stakeholder Engagement; from October 2019 to December 2020, Ms. DelFrari was Vice-President, Sustainability & Engagement; and from October 2017 to September 2019, Ms. DelFrari was Vice-President, Communications & Community Engagement. | |||
| J. Drew Zieglgansberger<br><br>Calgary, Alberta<br><br>Canada | Executive Vice-President & Chief Commercial Officer<br><br>Mr. Zieglgansberger was appointed Executive Vice-President & Chief Commercial Officer effective September 1, 2023. From March 2022 to August 2023, Mr. Zieglgansberger was Executive Vice-President, Natural Gas & Technical Services; from January 2021 to February 2022, Executive Vice-President, Upstream – Conventional & Integration; from January 2020 to January 2021, Executive Vice-President, Strategy & Corporate Development; and from January 2018 to December 2019, Executive Vice-President, Upstream. | |||
| Doreen A. Cole<br><br>Calgary, Alberta<br><br>Canada | Executive Vice-President, Downstream<br><br>Ms. Cole was appointed Executive Vice-President, Downstream effective September 1, 2023. From September 2021 to August 2023, Ms. Cole was Senior Vice-President, Downstream Manufacturing. From December 2017 to July 2021, Ms. Cole was Managing Director of The Syncrude Project, an oil sands joint venture project. | Cenovus Energy Inc. – 2023 Annual Information Form | 47 | |
| --- | --- | |||
| Name and Residence | Office Held and Principal Occupation During the Past Five Years | |||
| --- | --- | |||
| P. Andrew Dahlin<br><br>Calgary, Alberta<br><br>Canada | Executive Vice-President, Natural Gas & Technical Services<br><br>Mr. Dahlin was appointed Executive Vice-President, Natural Gas & Technical Services, effective September 1, 2023. From March 2022 to August 2023, Mr. Dahlin was Executive Vice-President, Corporate & Operations Services; and from January 2021 to February 2022, Mr. Dahlin was Executive Vice-President, Safety & Operations Technical Services. From November 2020 to January 2021, Mr. Dahlin was Executive Vice-President, Downstream & Midstream of Husky; from May 2020 to November 2020, Mr. Dahlin was Executive Vice President, Western Canada Upstream of Husky; and from May 2018 to April 2020, Mr. Dahlin was Senior Vice President, Heavy Oil & Oil Sands of Husky Oil Operations Limited. | |||
| Jeffrey R. Hart<br><br>Calgary, Alberta<br><br>Canada | Executive Vice-President, Corporate & Operations Services<br><br>Mr. Hart was appointed Executive Vice-President, Corporate & Operations Services effective September 1, 2023. From January 2021 to August 2023, Mr. Hart was Executive Vice-President & Chief Financial Officer; from November 2018 to January 2021, Mr. Hart was Chief Financial Officer of Husky; from April 2018 to November 2018, Mr. Hart was Acting Chief Financial Officer of Husky; and from October 2015 to April 2018, Mr. Hart was Vice President, Controller of Husky Oil Operations Limited. | |||
| Norrie C. Ramsay<br><br>Calgary, Alberta<br><br>Canada | Executive Vice-President, Upstream – Thermal, Major Projects & Offshore<br><br>Dr. Ramsay was appointed Executive Vice-President, Upstream – Thermal, Major Projects & Offshore effective January 1, 2021. From January 2020 to December 2020, Dr. Ramsay was Executive Vice-President, Upstream; from December 2019 to January 2020, Dr. Ramsay was Executive Vice-President. From September 2015 to November 2019, Dr. Ramsay was Senior Vice-President at TC Energy. | |||
| Gary F. Molnar<br><br>Calgary, Alberta<br><br>Canada | Senior Vice-President, Legal, General Counsel & Corporate Secretary<br><br>Mr. Molnar was appointed Senior Vice-President Legal, General Counsel & Corporate Secretary effective January 1, 2021. From December 2015 to December 2020, Mr. Molnar was Vice-President, Legal, Assistant General Counsel & Corporate Secretary. | |||
| Susan M. Anderson<br><br>Calgary, Alberta<br><br>Canada | Senior Vice-President, People Services<br><br>Ms. Anderson was appointed Senior Vice-President, People Services effective March 1, 2022. From January 2021 to February 2022, Ms. Anderson was Vice-President, Supply Chain Management. From November 2017 to January 2021, Ms. Anderson was Vice-President and Chief Procurement Officer of Husky. |
As of December 31, 2023, all of Cenovus’s directors and executive officers, as a group, beneficially owned or exercised control or direction over, directly or indirectly, 3,225,457 common shares or approximately 0.17 percent of the number of common shares that were outstanding as of such date.
Investors should be aware that some of Cenovus’s directors and officers are directors and officers of other private and public companies. Some of these private and public companies may, from time to time, be involved in business transactions or banking relationships which may create situations in which conflicts might arise. Any such conflicts shall be resolved in accordance with the Code and procedures and requirements of the relevant provisions of the CBCA, including the duty of such directors and officers to act honestly and in good faith with a view to the best interests of Cenovus.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
To the Company’s knowledge, none of its current directors or executive officers are, as at the date of this AIF, or have been, within 10 years prior to the date of this AIF, a director, chief executive officer or chief financial officer of any company that:
(a)was subject to a cease trade order, an order similar to a cease trade order or an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more than 30 consecutive days (each, an “Order”) that was issued while that director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or
(b)was subject to an Order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer.
To the Company’s knowledge, none of its directors or executive officers:
(a)is, as at the date of this AIF, or has been within 10 years prior to the date of this AIF, a director or executive officer of any company that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or
| Cenovus Energy Inc. – 2023 Annual Information Form | 48 |
|---|
(b)has, within 10 years prior to the date of this AIF, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director or executive officer.
To the Company’s knowledge, none of its directors or executive officers has been subject to:
(a)any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or
(b)any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.
| AUDIT COMMITTEE |
|---|
The Audit Committee mandate is included as Appendix C to this AIF.
Composition of The Audit Committee
The Audit Committee consists of four members, each of whom is independent and financially literate in accordance with National Instrument 52-110 “Audit Committees”. The Board determined that each of the following members of Cenovus’s Audit Committee qualifies as an “audit committee financial expert”, as that term is defined under U.S. securities legislation: Jane E. Kinney and Claude Mongeau. The education and experience of each of the members of the Audit Committee relevant to the performance of the responsibilities as an Audit Committee member is outlined below.
Jane E. Kinney (Audit Committee Chair)
Ms. Kinney is a chartered professional accountant, a Fellow of the Chartered Professional Accountants of Ontario (FCPA) and holds a Mathematics degree from the University of Waterloo. She is a seasoned business leader with over 30 years of experience in providing advisory services to global financial institutions and has extensive experience in enterprise risk management, regulatory compliance, cyber and IT risk management, digital transformation and stakeholder relations. Ms. Kinney is a director and Chair of the Audit Committee of Intact Financial Corporation, a publicly traded insurance company, since May 2019. She spent 25 years with Deloitte and was admitted to the Deloitte Partnership in 1997. Ms. Kinney was appointed Vice Chair, Leadership Team Member of Deloitte in June 2010 and served in this role until her retirement in June 2019. Ms. Kinney’s previous positions with Deloitte include Canadian Managing Partner, Quality & Risk from May 2010 to June 2015, Global Chief Risk Officer from June 2010 to May 2012, and Risk and Regulatory Practice Leader from June 1999 to May 2010.
Richard J. Marcogliese
Mr. Marcogliese holds a Bachelor of Engineering degree in Chemical Engineering from the New York University School of Engineering and Science. He is the Principal of iRefine, LLC, a privately owned petroleum refining consulting company, since June 2011; and a director and a member of the Audit Committee of Delek US Holdings, Inc., a publicly traded downstream energy company, since January 2020. Mr. Marcogliese served as Executive Advisor of Pilko & Associates L.P., a private chemical and energy advisory company, from June 2011 to December 2019; Operations Advisor to NTR Partners III LLC, a private investment company from October 2013 to December 2017; and from September 2012 to January 2016 as Operations Advisor to the Chief Executive Officer of Philadelphia Energy Solutions, a partnership between The Carlyle Group and a subsidiary of Energy Transfer Partners, L.P. that operated an oil refining complex on the U.S. Eastern seaboard.
Claude Mongeau
Mr. Mongeau holds a Master’s in Business Administration degree from McGill University and has received honorary doctorate degrees from St. Mary’s and Windsor University. He is a director of The Toronto-Dominion Bank, an international financial institution, since March 2015, and Norfolk Southern Corporation, a publicly traded rail transportation provider, since September 2019. Mr. Mongeau served as a director of TELUS Corporation, a publicly traded telecommunications company, from May 2017 to August 2019. He served as a director of Canadian National Railway Company (“CN”), a publicly traded railroad and transportation company, from October 2009 to July 2016 and as President and Chief Executive Officer from January 2010 to June 2016. During his tenure with CN, he served as Executive Vice-President and Chief Financial Officer from October 2000 until December 2009 and from the time he joined CN in 1994 he held the titles of Senior Vice-President and Chief Financial Officer, Vice-President, Strategic and Financial Planning and Assistant Vice-President, Corporate Development.
| Cenovus Energy Inc. – 2023 Annual Information Form | 49 |
|---|
Wayne E. Shaw
Mr. Shaw holds a Bachelor of Arts degree and a Bachelor of Laws degree from the University of Alberta. He is a member of the Law Society of Ontario. He is the President of G.E. Shaw Investments Limited, a private investment holding company, since 2012. Prior to his retirement in 2013, Mr. Shaw was a Senior Partner with Stikeman Elliott LLP, Barristers and Solicitors, Toronto, Ontario.
Pre-Approval Policies and Procedures
Cenovus has adopted policies and procedures with respect to the pre-approval of audit and permitted non-audit services to be provided by PricewaterhouseCoopers LLP. The Audit Committee has established a budget for the provision of a specified list of audit and permitted non-audit services that the Audit Committee believes to be typical, recurring or otherwise likely to be provided by PricewaterhouseCoopers LLP, the Company’s auditor. Subject to the Audit Committee’s discretion, the budget generally covers the period between the adoption of the budget and the next meeting of the Audit Committee. The list of permitted services is sufficiently detailed to ensure that (i) the Audit Committee knows precisely what services it is being asked to pre-approve, and (ii) it is not necessary for any member of management to make a judgment as to whether a proposed service fits within the pre-approved services.
Subject to the following paragraph, the Audit Committee has delegated authority to the Audit Committee Chair to pre-approve the provision of permitted services by PricewaterhouseCoopers LLP which are not otherwise pre-approved by the Audit Committee, including the fees and terms of the proposed services (“Delegated Authority”). Any required determination about the Chair’s unavailability will be required to be made by the good faith judgment of the applicable other member(s) of the Audit Committee after considering all facts and circumstances deemed by such member(s) to be relevant. All pre-approvals granted pursuant to Delegated Authority must be presented by the member(s) who granted the pre-approvals to the full Audit Committee at its next meeting.
The fees payable in connection with any particular service to be provided by PricewaterhouseCoopers LLP that have been pre-approved pursuant to Delegated Authority (i) may not exceed $200,000, in the case of pre-approvals granted by the Chair of the Audit Committee, and (ii) may not exceed $50,000, in the case of pre-approvals granted by any other member of the Audit Committee.
All proposed services or the fees payable in connection with such services that have not already been pre-approved must be pre-approved by either the Audit Committee or pursuant to Delegated Authority. Prohibited services may not be pre-approved by the Audit Committee or pursuant to Delegated Authority.
External Auditor Service Fees
The following table provides information about the fees billed to Cenovus for professional services rendered by PricewaterhouseCoopers LLP in the years ended December 31, 2023 and 2022:
| ($ thousands) | 2023 | 2022 |
|---|---|---|
| Audit Fees (1) | 4,423 | 4,069 |
| Audit-Related Fees (2) | 655 | 321 |
| Tax Fees (3) | 137 | 227 |
| All Other Fees (4) | 120 | 67 |
| Total | 5,335 | 4,684 |
(1)Audit fees consist of the aggregate fees billed for the audit of the Company’s consolidated financial statements or services that are normally provided in connection with statutory and regulatory filings or engagements.
(2)Audit-related fees consist of the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported as audit fees. The services provided in this category included audit-related services in relation to Cenovus’s ESG disclosures, prospectuses, and participation fees levied by the Canadian Public Accountability Board. Fees related to the acquisition or divestiture of assets are also included in audit-related fees.
(3)Tax fees consist of the aggregate fees billed for tax compliance, tax advice and expatriate tax services.
(4)All other fees include fees billed for the review of Extractive Sector Transparency Measures Act filings and services around filings.
| LEGAL PROCEEDINGS AND REGULATORY ACTIONS |
|---|
During the year ended December 31, 2023, there were no legal proceedings to which Cenovus is or was a party, or that any of its property is or was the subject of, which involves a claim for damages in an amount, exclusive of interest and costs, that exceeds 10 percent of Cenovus’s current assets and it is not aware of any such legal proceedings that are contemplated.
During the year ended December 31, 2023, there were no penalties or sanctions imposed against Cenovus by a court relating to securities legislation or by a securities regulatory authority, nor have there been any other penalties or sanctions imposed by a court or regulatory body against the Company that would likely be considered important to a reasonable investor in making an investment decision, and it has not entered into any settlement agreements before a court relating to securities legislation or with a securities regulatory authority.
| Cenovus Energy Inc. – 2023 Annual Information Form | 50 |
|---|---|
| INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS | |
| --- |
None of the Company’s directors or executive officers or any person or company that beneficially owns, or controls or directs, directly or indirectly, more than 10 percent of any class or series of Cenovus’s outstanding voting securities, or any associate or affiliate of any of the foregoing persons or companies, in each case, as at the date of this AIF, has or has had any material interest, direct or indirect, in any past transaction within the three most recently completed financial years or any proposed transaction that has materially affected or is reasonably expected to materially affect Cenovus.
| TRANSFER AGENTS AND REGISTRARS | | --- || In Canada: | In the United States: | | --- | --- | | Computershare Investor Services, Inc.<br><br>8th Floor, 100 University Avenue<br><br>Toronto, ON M5J 2Y1<br><br>Canada | Computershare Trust Company NA<br><br>150 Royall St.<br><br>Canton, MA 02021<br><br>U.S. | | Tel: 1-866-332-8898<br><br>Website: www.investorcentre.com/cenovus | | | MATERIAL CONTRACTS | | --- |
Other than as set forth below, during the year ended December 31, 2023, Cenovus has not entered into any contracts, nor are there any contracts still in effect, that are material to Cenovus, other than contracts entered into in the ordinary course of business.
Arrangement Standstill Agreements
On October 24, 2020, each of Hutchison Whampoa Europe Investments S.à r.l. (“Hutchison”) and L.F. Investments S.à r.l. (“L.F. Investments”) entered into a separate standstill agreement with Cenovus (each, an “Arrangement Standstill Agreement”), with effect as of January 1, 2021. Each Arrangement Standstill Agreement sets forth certain restrictions and obligations in connection with such shareholder’s shareholdings in Cenovus following completion of the transactions contemplated by the Arrangement, including but not limited to the following:
(a)subject to certain exceptions, without the prior written consent of Cenovus, such shareholder agreed that it will not acquire, agree to acquire or make any proposal or offer to acquire voting or equity securities of Cenovus or any of its subsidiaries (other than Cenovus Warrants), securities convertible into, or exercisable or exchangeable for, voting or equity securities of Cenovus or any of its subsidiaries (other than Cenovus Warrants) or any assets of Cenovus or any of its subsidiaries;
(b)for a period of 18 months following January 1, 2021, such shareholder agreed not to transfer or cause the transfer of any common shares, except as otherwise permitted by the Arrangement Standstill Agreement;
(c)without the prior written consent of Cenovus, such shareholder will not transfer or cause the transfer of, either alone or in the aggregate with its affiliates, the other shareholder or the other shareholder’s affiliates, any common shares or Cenovus Warrants to any person, if such transfer would, to the knowledge of the shareholder, result in such person, together with any persons acting jointly or in concert with such person, beneficially owning, or controlling or directing, 20 percent or more of the then-outstanding common shares, except (i) transfers effected through an underwritten public offering (including an underwritten public offering undertaken pursuant to the applicable Arrangement Registration Rights Agreement (defined below); (ii) transfers effected as a result of the consummation of an arrangement, amalgamation, merger or other similar business combination transaction involving Cenovus which has been approved by a resolution of holders of the common shares, or made to an offeror in relation to a take-over bid as set out in the Arrangement Standstill Agreement; or (iii) transfers to an affiliate as permitted by the Arrangement Standstill Agreement (together with subparagraph (b), the “Transfer Restrictions”); and
(d)such shareholder is subject to voting restrictions with respect to certain Board matters relating to the election of Cenovus’s directors and in connection with any arrangement, amalgamation, merger or other similar business combination transaction involving Cenovus.
| Cenovus Energy Inc. – 2023 Annual Information Form | 51 |
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The Arrangement Standstill Agreements terminate on the earlier of January 1, 2026, the date on which either of the Arrangement Standstill Agreement is terminated by the written agreement of the parties, provided that the Transfer Restrictions have been complied with under each Arrangement Standstill Agreement, the date on which Hutchison and L.F. Investments, together with their affiliates, cease to beneficially own, or control or direct, in aggregate, at least 10 percent of the then-outstanding common shares, or any Qualified Individual (as defined in the Arrangement Standstill Agreements) duly nominated in accordance with the Arrangement Standstill Agreements is not appointed to the Board in accordance with the Arrangement Standstill Agreements.
Copies of the Arrangement Standstill Agreements were filed on SEDAR+ on November 3, 2020, and available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
The following table summarizes the number of Cenovus securities subject to the Transfer Restrictions as at December 31, 2023:
| Name of Holder | Designation of Securities | Number of Securities subject to Transfer Restrictions (1) | Percentage of Class |
|---|---|---|---|
| Hutchison Whampoa Europe Investments S.à r.l. | Common Shares | 316,927,051 | 16.9 |
| L.F. Investments S.à r.l. | Common Shares | 231,194,699 | 12.4 |
| Total | 548,121,750 | 29.3 |
(1) The date on which the Transfer Restrictions end is described above.
Arrangement Registration Rights Agreements
On January 1, 2021, Cenovus and each of Hutchison and L.F. Investments entered into a registration rights agreement (each, an “Arrangement Registration Rights Agreement”) which provides such shareholders with certain rights to facilitate the sale of their Registrable Securities (as defined in the Arrangement Registration Rights Agreements), including the right to require Cenovus to qualify the distribution of the Registrable Securities held by such shareholders and the right to piggy-back on an offering of common shares by Cenovus. These rights are available to such shareholders for a term that began on July 1, 2022, and will cease on the earlier of January 1, 2026, the date on which the Arrangement Registration Rights Agreement is terminated by agreement of the parties, the date the holder ceases to, directly or indirectly, beneficially own in aggregate more than 5 percent of the then-outstanding common shares, or the date on which the Arrangement Standstill Agreements are terminated.
Copies of the Arrangement Registration Rights Agreements were filed on SEDAR+ on January 4, 2021, and available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
Arrangement Pre-Emptive Rights Agreements
On January 1, 2021, Cenovus and each of Hutchison and L.F. Investments entered into a pre-emptive rights agreement (each, an “Arrangement Pre-Emptive Rights Agreement”) that provides such shareholders with certain rights to allow such shareholder to maintain its pro rata share of the then-outstanding common shares. These rights are available to such shareholders for a term that began on January 1, 2021, and will cease on the earlier of January 1, 2026, the date on which the Arrangement Pre-Emptive Rights Agreement is terminated by agreement of the parties, the date the shareholder ceases to, directly or indirectly, beneficially own in aggregate more than 5 percent of the then-outstanding common shares, or the date on which the Arrangement Standstill Agreements are terminated.
Copies of the Arrangement Pre-Emptive Rights Agreements were filed on SEDAR+ on January 4, 2021, and available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
Warrant Indenture
At closing of the Arrangement, the Cenovus Warrants were created and issued pursuant to the terms of the Warrant Indenture entered into with Computershare Trust Company of Canada, as warrant agent, which governs the Cenovus Warrants. The Warrant Indenture provides for customary adjustments to the number of common shares issuable upon exercise of the Cenovus Warrants and/or to the exercise price in effect for the Cenovus Warrants, and for adjustment in the class and/or number of securities issuable upon exercise of the Cenovus Warrants and/or to the exercise price for the Cenovus Warrants, upon the occurrence of certain events. Cenovus also covenants in the warrant Indenture that, so long as any Cenovus Warrant remains outstanding, Cenovus will give notice to holders of Cenovus Warrants of certain stated events, including events that would result in an adjustment to the exercise price for the Cenovus Warrants or the number of common shares issuable upon exercise of the Cenovus Warrants, at least 10 business days prior to the record date of such event.
A copy of the Warrant Indenture was filed on SEDAR+ on January 4, 2021, and available on SEDAR+ at sedarplus.ca and EDGAR at sec.gov.
| Cenovus Energy Inc. – 2023 Annual Information Form | 52 |
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| INTERESTS OF EXPERTS | |
| --- |
The Company’s independent auditors are PricewaterhouseCoopers LLP, who have issued an independent auditor’s report dated February 14, 2024 in respect of Cenovus’s consolidated financial statements that comprise the consolidated balance sheets as at December 31, 2023 and December 31, 2022 and the consolidated statements of earnings (loss), consolidated statements of comprehensive income (loss), consolidated statements of equity and consolidated statements of cash flows for the years ended December 31, 2023, and 2022, and Cenovus’s internal control over financial reporting as at December 31, 2023. PricewaterhouseCoopers LLP has advised that they are independent with respect to Cenovus within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Alberta and the rules of the U.S. Securities and Exchange Commission (“SEC”).
Information relating to reserves in this AIF has been calculated by McDaniel and GLJ as independent qualified reserves evaluators. The partners, employees or consultants of each of McDaniel and GLJ, in each case, as a group own beneficially, directly or indirectly, less than one percent of any class of the Company’s outstanding securities.
| ADDITIONAL INFORMATION |
|---|
Additional information relating to Cenovus is available on SEDAR+ at sedarplus.ca, on EDGAR at sec.gov and on the Company’s website at cenovus.com. Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of Cenovus’s securities, and securities authorized for issuance under its equity-based compensation plans, is included in the Company’s management information circular for its most recent annual meeting of shareholders.
Additional financial information concerning Cenovus as at December 31, 2023, can be found in Cenovus’s consolidated financial statements and MD&A for the year ended December 31, 2023.
As a Canadian corporation listed on the NYSE, Cenovus is not required to comply with most of the NYSE’s corporate governance standards, and instead may comply with Canadian corporate governance practices. However, the Company is required to disclose the significant differences between its corporate governance practices and the requirements applicable to U.S. domestic companies listed on the NYSE. Except as summarized on the Company’s website at cenovus.com, the Company is in compliance with the NYSE corporate governance standards in all significant respects.
| ACCOUNTING MATTERS |
|---|
Unless otherwise specified, all dollar amounts are expressed in Canadian dollars. All references to “dollars”, “C$” or to “$” are to Canadian dollars and all references to “US$” are to U.S. dollars. The information contained in this AIF is dated as at December 31, 2023 unless otherwise indicated. Numbers presented are rounded to the nearest whole number and tables may not add due to rounding.
Unless otherwise indicated, all financial information included in this AIF has been prepared in accordance with International Financial Reporting Accounting Standards, which are generally accepted accounting principles for publicly accountable enterprises in Canada.
| Cenovus Energy Inc. – 2023 Annual Information Form | 53 | ||||||
|---|---|---|---|---|---|---|---|
| ABBREVIATIONS AND CONVERSIONS | |||||||
| --- | Crude Oil and NGLs | Natural Gas | Other | ||||
| --- | --- | --- | --- | --- | --- | ||
| bbl | barrel | Mcf | thousand cubic feet | BOE | barrel of oil equivalent | ||
| Mbbls/d | thousand barrels per day | MMcf | million cubic feet | MBOE/d | thousand barrels of oil equivalent per day | ||
| MMbbls | million barrels | MMcf/d | million cubic feet per day | MMBOE | million barrels of oil equivalent | ||
| WTI | West Texas Intermediate | Bcf | billion cubic feet | OPEC | Organization of Petroleum Exporting Countries | ||
| WCS | Western Canadian Select | MMBtu | million British thermal units | OPEC+ | OPEC and a group of 10 non-OPEC members | ||
| AWB | Access Western Blend | GHG | greenhouse gas | ||||
| CDB | Christina Dilbit Blend | AECO | Alberta Energy Company | ||||
| CLB | Cold Lake Blend | ||||||
| WDB | Western Canada Dilbit Blend |
In this AIF, natural gas volumes are 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 AIF 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 historical trends. Although we believe 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”, “opportunities”, “plan”, “potential”, “progress”, “schedule”, “target”, “view” and “will”, or similar expressions and includes suggestions of future outcomes, including, but not limited to, statements about: returning incremental value to shareholders through buybacks and/or variable dividends in accordance with the capital allocation framework; net debt targets and excess free funds flow; share repurchases under the NCIB; the impacts of the FNMPC; the extension of the production life of the Terra Nova field; peak production and timing to achieve first oil from the West White Rose Project; development of the Narrows Lake resource and timing to achieve first stream from the field; development of the MDK fields and anticipated timing with respect to production; exploration and development at Block DW-1; expected levels and timing of production for any facility, project, segment or the Company as a whole; the development of the Company’s carbon capture and sequestration project; the redemption of the Company’s preferred shares; the use of financial derivatives and other arrangements; limiting the Company’s impact on climate, air, water, land and wildlife; investing in technology; improving operating practices; collaborating with third parties to find innovative solutions to minimize Cenovus’s environmental impact and maximize business value; the health and safety of all workers and the residents of the communities where Cenovus operates; relationships with Indigenous communities and other stakeholders; human rights; sustainable operation of the business; funding future development costs; margins and netbacks; optimizing product mix, delivery points, transportation commitments and customer diversification; unlocking resource potential; capturing global prices for crude oil production; capturing value; forecast operating and financial results; forecast capital expenditures; techniques expected to be used to recover reserves; abandonment and reclamation costs; funding decommissioning liabilities; expected payment of taxes, royalties and other payments; potential impacts of various identified risk factors, including those related to commodity prices and climate change; reserves and related information, development of reserves, future net revenue, future development costs and funding of future development costs; expected capacities, including for projects, processing, storage, transportation and refining; interest and cost of external funding; regulatory, partner or internal approvals; impact of regulatory measures; forecast commodity prices, inflation, exchange rates and trends and expected impacts to the Company; and future use and development of technology. 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.
Statements relating to “reserves” are deemed to be forward looking information, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated, and can be profitably produced in the future.
| Cenovus Energy Inc. – 2023 Annual Information Form | 54 |
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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 bitumen, crude 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 acquisitions; the accuracy of any assessments undertaken in connection with acquisitions; forecast production and crude throughput volumes and timing thereof; forecast prices and costs; 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, royalty regimes, interest rates, inflation, foreign exchange rates, global economic activity, competitive conditions and the supply and demand for bitumen, 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 conditions, natural disaster, accidents, third-party actions, 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; increases to the Company’s share price and market capitalization over the long term; opportunities to purchase Company shares for cancellation at prices acceptable to the Company; the Company’s ability to use financial derivatives to manage its exposure to fluctuations in commodity prices, foreign exchange and interest rates; the sufficiency of cash balances, internally generated cash flows, existing credit facilities, management of the Company’s asset portfolio and access to capital and insurance coverage at a reasonable cost to pursue and fund future investments, sustainability and development plans and shareholder returns, including any increase thereto; 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; 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 Canada; market and business conditions; forecast inflation and other assumptions inherent in the Company’s 2024 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. 2024 guidance, as updated December 13, 2023, and available on cenovus.com, assumes: Brent prices of US$79.00 per barrel, WTI prices of US$75.00 per barrel; WCS of US$58.00 per barrel; Differential WTI-WCS of US$17.00 per barrel; AECO natural gas prices of $2.80 per Mcf; Chicago 3-2-1 crack spread of US$21.00 per barrel; and an exchange rate of $0.73 US$/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 Company’s ability to realize the anticipated benefits of acquisitions in a timely manner or at all; the Company’s ability to successfully integrate acquired businesses with its own in a timely and cost effective manner; unforeseen or underestimated liabilities associated with 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; developing and implementing strategies to meet climate and GHG emissions targets and ambitions; volatility of and other assumptions regarding commodity prices; the duration of any market downturn; the Company’s ability to integrate upstream and downstream operations to help mitigate the impact of volatility in light-heavy crude oil differentials and contribute to its net earnings; foreign exchange risk, including related to agreements denominated in foreign currencies; the Company’s continued liquidity being sufficient to sustain operations through a prolonged market downturn; 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; product supply and demand; the accuracy of the Company’s share price and market capitalization
| Cenovus Energy Inc. – 2023 Annual Information Form | 55 |
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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; the ability to complete and optimize drilling, completion, tie-in and infrastructure projects; the ability of the Company to ramp-up activities at its refineries on its anticipated timelines; 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; tax audits and reassessments; 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 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 at facilities operated by our partners or third parties, such as blowouts, fires, explosions, railcar incidents or derailments, aviation incidents, iceberg collisions, 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, adverse sea conditions, extreme weather events, natural disasters, acts of activism, 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; geopolitical 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 and diverse 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 its most recently filed annual Management’s Discussion and Analysis, and to the risk factors described in other documents the Company files from time to time with securities regulatory authorities in Canada, available on SEDAR+ at sedarplus.ca, 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 AIF unless expressly incorporated by reference herein.
| Cenovus Energy Inc. – 2023 Annual Information Form | 56 |
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| APPENDIX A | |
| --- |
Report on Reserves Data By Independent Qualified Reserves Evaluators
To the Board of Directors of Cenovus Energy Inc. (the “Corporation”):
1.We have evaluated the Corporation’s reserves data as at December 31, 2023. The reserves data are estimates of proved reserves and probable reserves and related future net revenue as at December 31, 2023, estimated using forecast prices and costs.
2.The reserves data are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the reserves data based on our evaluation.
3.We carried out our evaluation in accordance with standards set out in the Canadian Oil and Gas Evaluation Handbook as amended from time to time (the “COGE Handbook”) maintained by the Society of Petroleum Evaluation Engineers (Calgary Chapter).
4.Those standards require that we plan and perform an evaluation to obtain reasonable assurance as to whether the reserves data are free of material misstatement. An evaluation also includes assessing whether the reserves data are in accordance with principles and definitions presented in the COGE Handbook.
5.The following table shows the net present value of future net revenue (before deduction of income taxes) attributed to proved plus probable reserves, estimated using forecast prices and costs and calculated using a discount rate of 10 percent, included in the reserves data of the Corporation evaluated for the year ended December 31, 2023, and identifies the respective portions thereof that we have evaluated and reported on to the Corporation’s management and Board of Directors:
| Independent Qualified Reserves Evaluator | Effective Date of Evaluation Report | Location of Reserves | Evaluated Net Present Value of Future Net Revenue<br><br>(Before Income Taxes, 10% Discount Rate)<br><br>($ millions) |
|---|---|---|---|
| McDaniel & Associates Consultants Ltd. | December 31, 2023 | Canada | 77,706 |
| McDaniel & Associates Consultants Ltd. | December 31, 2023 | China | 3,143 |
| McDaniel & Associates Consultants Ltd. | December 31, 2023 | Indonesia | 648 |
| GLJ Ltd. | December 31, 2023 | Canada | 3,071 |
| 84,568 |
6.In our opinion, the reserves data respectively evaluated by us have, in all material respects, been determined and are in accordance with the COGE Handbook, consistently applied.
7.We have no responsibility to update our reports referred to in paragraph five for events and circumstances occurring after the effective date of our reports.
8.Because the reserves data are based on judgments regarding future events, actual results will vary and the variations may be material.
Executed as to our report referred to above:
| /s/ Brian R. Hamm | /s/ Jodi L. Anhorn |
|---|---|
| Brian R. Hamm, P. Eng.<br><br>President & CEO<br><br>McDaniel & Associates Consultants Ltd.<br><br>Calgary, Alberta, Canada | Jodi L. Anhorn, M.Sc., P. Eng.<br><br>President and Chief Executive Officer<br><br>GLJ Ltd.<br><br>Calgary, Alberta, Canada |
February 14, 2024
| Cenovus Energy Inc. – 2023 Annual Information Form | 57 |
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| APPENDIX B | |
| --- |
Report of Management and Directors on Reserves Data and Other Information
Management of Cenovus Energy Inc. (the “Corporation”) are responsible for the preparation and disclosure of information with respect to the Corporation’s oil and gas activities in accordance with securities regulatory requirements. This information includes reserves data.
Independent qualified reserves evaluators have evaluated the Corporation’s reserves data. The report of the independent qualified reserves evaluators will be filed with securities regulatory authorities concurrently with this report.
The Safety, Sustainability and Reserves Committee of the Board of Directors of the Corporation has:
(a)reviewed the Corporation’s procedures for providing information to the independent qualified reserves evaluators;
(b)met with the independent qualified reserves evaluators to determine whether any restrictions affected the ability of the independent qualified reserves evaluators to report without reservation; and
(c)reviewed the reserves data with management and each of the independent qualified reserves evaluators.
The Safety, Sustainability and Reserves Committee of the Board of Directors of the Corporation has reviewed the Corporation’s procedures for assembling and reporting other information associated with oil and gas activities and has reviewed that information with management. The Board of Directors has, on the recommendation of the Safety, Sustainability and Reserves Committee, approved:
(a)the content and filing with securities regulatory authorities of the reserves data and other oil and gas information;
(b)the filing of the report of the independent qualified reserves evaluators on the reserves data; and
(c)the content and filing of this report.
Because the reserves data are based on judgments regarding future events, actual results will vary and the variations may be material.
| /s/ Jonathan M. McKenzie | /s/ Karamjit S. Sandhar |
|---|---|
| Jonathan M. McKenzie<br><br>President & Chief Executive Officer<br><br>Cenovus Energy Inc. | Karamjit S. Sandhar<br><br>Executive Vice-President & Chief Financial Officer<br><br>Cenovus Energy Inc. |
| /s/ Alexander J. Pourbaix | /s/ Richard J. Marcogliese |
| Alexander J. Pourbaix<br><br>Executive Chair<br><br>Cenovus Energy Inc. | Richard J. Marcogliese<br><br>Director and Chair of the Safety, Sustainability and Reserves Committee<br><br>Cenovus Energy Inc. |
February 14, 2024
| Cenovus Energy Inc. – 2023 Annual Information Form | 58 |
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| APPENDIX C | |
| --- |
Audit Committee Mandate
The Audit Committee (the “Committee”) is a committee of the Board of Directors (the “Board”) of Cenovus Energy Inc. (“Cenovus” or the “Corporation”) appointed to act in an advisory capacity to the Board and assist the Board in fulfilling its oversight responsibilities.
The Committee’s primary duties and responsibilities are to:
•Oversee and monitor the effectiveness and integrity of the Corporation’s accounting and financial reporting processes, financial statements and system of internal controls regarding accounting and financial reporting compliance.
•Oversee audits of the Corporation’s financial statements.
•Oversee and monitor the Corporation’s market risk management framework, including supporting guidelines and policies, related to the management of commodity price, currency (foreign exchange), and interest rate market risk.
•Oversee and monitor management’s identification of principal financial risks and monitor the process to manage such risks.
•Oversee and monitor the Corporation’s compliance with legal and regulatory requirements related to financial reporting and disclosures.
•Oversee and monitor the qualifications, independence and performance of the Corporation’s external auditors and internal auditing group.
•Provide an avenue of communication among the external auditors, management, the internal auditing group and the Board.
The Committee has the authority to conduct any review or investigation appropriate to fulfilling its responsibilities. The Committee shall have unrestricted access to personnel and information, and any resources necessary to carry out its responsibility. In this regard, the Committee may direct internal audit personnel to particular areas of examination.
Constitution, Composition and Definitions
1.Reporting
The Committee shall report to the Board.
2.Composition of Committee
The Committee shall consist of not less than three and not more than eight directors, all of whom shall qualify as independent directors pursuant to National Instrument 52-110 Audit Committees (as implemented by the Canadian Securities Administrators (“CSA”) and as amended from time to time) (“NI 52-110”).
All members of the Committee shall be financially literate, as defined in NI 52-110, and at least one member shall have accounting or related financial managerial expertise.
At least one member shall have experience in the oil and gas industry.
Committee members shall not simultaneously serve on the audit committees of more than two other public companies, unless the Board first determines that such simultaneous service shall not impair the ability of the relevant members to effectively serve on the Committee, and required public disclosure is made.
The non-executive Board Chair shall be a non-voting member of the Committee. See “Quorum” for further details.
3.Appointment of Committee Members
Committee members shall be appointed by the Board, effective after the election of directors at the annual meeting of shareholders, provided that any member may be removed or replaced, subject to any requirements under the heading “Composition of Committee” above, at any time by the Board and shall, in any event, cease to be a Committee member upon ceasing to be a Board member.
4.Vacancies
Where a vacancy occurs at any time in the membership of the Committee, it may be filled by the Board.
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5.Chair
The Governance Committee shall recommend for approval to the Board an independent Director to act as Chair of the Committee (the “Chair”). The Board shall appoint the Chair.
If unavailable or unable to attend a meeting of the Committee, the Chair shall ask another member to chair the meeting, failing which a member of the Committee present at the meeting shall be chosen to preside over the meeting by a majority of the members of the Committee present at such meeting.
The Chair presiding at any meeting of the Committee shall not have a casting vote.
The items pertaining to the Chair in this section should be read in conjunction with the Committee Chair section of the Chair of the Board of Directors and Committee Chair General Guidelines.
6.Secretary
The Committee shall appoint a Secretary who need not be a member of the Committee. The Secretary shall keep minutes of the meetings of the Committee.
7.Committee Meetings
The Committee shall meet at least quarterly. The Chair may call additional meetings as required. In addition, a meeting may be called by the non-executive Board Chair, the President & Chief Executive Officer, or any member of the Committee or by the external auditors.
Committee meetings may, by agreement of the Chair, be held in person, by video conference, by means of telephone, by other electronic or communication facility or by a combination of any of the foregoing.
At every Committee meeting the Committee shall meet without the presence of management.
8.Notice of Meeting
Notice of the time and place of each meeting may be given orally, or in writing, or by facsimile, or by electronic means to each member of the Committee at least 24 hours prior to the time fixed for such meeting. Notice of each meeting shall also be given to the external auditors of the Corporation.
A member and the external auditors may, in any manner, waive notice of the Committee meeting. Attendance of a member at a meeting shall constitute waiver of notice of the meeting except where a member attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting was not lawfully called.
9.Quorum
A majority of Committee members, present in accordance with section 7, shall constitute a quorum. In addition, if an ex officio, non-voting member’s presence is required to attain a quorum of the Committee, then the said member shall be allowed to cast a vote at the meeting.
10.Attendance at Meetings
The President & Chief Executive Officer, the Chief Financial Officer, the Comptroller and the head of internal audit are expected to be available to attend the Committee’s meetings or portions thereof.
The Committee may, by specific invitation, have other resource persons in attendance.
The Committee shall have the right to determine who shall, and who shall not, be present at any time during a meeting of the Committee.
Directors who are not members of the Committee may attend Committee meetings, on an ad hoc basis, upon prior consultation and approval by the Chair or by a majority of the members of the Committee.
11.Minutes
Minutes of Committee meetings shall be sent to all Committee members. The Committee shall report its activities to the full Board at the next regularly scheduled Board meeting or more frequently as determined appropriate by the Chair.
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Specific Responsibilities
In carrying out its oversight responsibilities and its mandate, the Committee is expected to:
12.Review Procedures
(a)Review the summary of the Committee’s composition and responsibilities in the Corporation’s annual report, annual information form or other public disclosure documentation.
(b)Review the summary of all approvals by the Committee of the provision of audit, audit-related, tax and other services by the external auditors for inclusion in the Corporation’s annual report and annual information form, or other publicly filed disclosure documentation.
13.Annual Financial Statements
(a)Discuss and review with management and the external auditors the Corporation’s and any subsidiary with public securities’ annual audited financial statements and related documents prior to their filing or distribution. Such review shall include:
(i)The annual financial statements and related notes including significant issues regarding accounting principles, practices and significant management estimates and judgments, including any significant changes in the Corporation’s selection or application of accounting principles, any major issues as to the adequacy of the Corporation’s internal controls and any special steps adopted in light of material control deficiencies.
(ii)Management’s Discussion and Analysis.
(iii)The use of off-balance sheet financing, including management’s risk assessment and adequacy of disclosure.
(iv)The external auditors’ audit examination of the financial statements and their report thereon.
(v)Any significant changes required in the external auditors’ audit plan.
(vi)Any serious difficulties or disputes with management encountered during the course of the audit, including any restrictions on the scope of the external auditors’ work or access to required information.
(vii)Other matters related to the conduct of the audit, which are to be communicated to the Committee under generally accepted auditing standards.
(b)Review and formally recommend approval to the Board of the Corporation’s:
(i)Year-end audited financial statements. Such review shall include discussions with management and the external auditors as to:
i.The accounting policies of the Corporation and any changes thereto.
ii.The effect of significant judgments, accruals and estimates.
iii.The manner of presentation of significant accounting items.
iv.The consistency of disclosure.
(ii)Management’s Discussion and Analysis.
(iii)Annual Information Form as to financial information.
(iv)All prospectuses and information circulars, as to financial information.
The review shall include a report from the external auditors about the quality of the most critical accounting principles upon which the Corporation’s financial status depends, and which involve the most complex, subjective or significant judgmental decisions or assessments.
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14.Quarterly Financial Statements
(a)Review with management and the external auditors and either approve (such approval to include the authorization for public release) or formally recommend for approval to the Board the Corporation’s:
(i)Quarterly unaudited financial statements and related documents, including Management’s Discussion and Analysis.
(ii)Any significant changes to the Corporation’s accounting principles.
(b)Review quarterly unaudited financial statements prior to their distribution of any subsidiary of the Corporation with public securities.
15.Other Financial Filings and Public Documents
Review and discuss with management financial information, including earnings press releases, the use of “pro forma” or non-GAAP financial information and earnings guidance, contained in any filings with the CSA or SEC or press releases related thereto, and consider whether the information is consistent with the information contained in the financial statements of the Corporation or any subsidiary with public securities.
16.Internal Control Environment
(a)Receive from and review with management, the external auditors and the internal auditors an annual report on the Corporation’s control environment as it pertains to the Corporation’s financial reporting process and controls.
(b)Review and discuss significant financial risks or exposures and assess the steps management has taken to monitor, control, report and mitigate such risk to the Corporation.
(c)Review in consultation with the internal auditors and the external auditors, the degree of coordination in the audit plans of the internal auditors and the external auditors and enquire as to the extent the planned scope can be relied upon to detect weaknesses in internal controls, fraud or other illegal acts. The Committee shall assess the coordination of audit effort to assure completeness of coverage and the effective use of audit resources. Any significant recommendations made by the auditors for the strengthening of internal controls shall be reviewed and discussed with management.
(d)Review with the President & Chief Executive Officer, the Chief Financial Officer of the Corporation and the external auditors: (i) all significant deficiencies and material weaknesses in the design or operation of the Corporation’s internal controls and procedures for financial reporting which could adversely affect the Corporation’s ability to record, process, summarize and report financial information required to be disclosed by the Corporation in the reports that it files or submits under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”) or applicable Canadian federal and provincial legislation and regulations within the required time periods, and (ii) any fraud, whether or not material, that involves management of the Corporation or other employees who have a significant role in the Corporation’s internal controls and procedures for financial reporting.
(e)Review significant findings prepared by the external auditors and the internal auditing department together with management’s responses.
17.Other Review Items
(a)Review the process for the certification of the interim and annual financial statements by the President & Chief Executive Officer and Chief Financial Officer, and the certifications made by the President & Chief Executive Officer and Chief Financial Officer.
(b)Review policies and procedures with respect to officers’ and directors’ expense accounts and perquisites, including their use of corporate assets, and consider the results of any review of these areas by the internal auditor or the external auditors.
(c)Review all related party transactions between the Corporation and any executive officers or directors, including affiliations of any executive officers or directors.
(d)Review with the General Counsel, the head of internal audit and the external auditors the results of their review of the Corporation’s monitoring of compliance with each of the Corporation’s published codes of business conduct and applicable legal requirements.
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(e)Review legal and regulatory matters, including correspondence with and reports received from regulators and government agencies, that may have a material impact on the interim or annual financial statements or other documents filed with regulators containing financial information and related corporate compliance policies and programs. Members from the Legal and Tax groups should be at the meeting to deliver their respective reports.
(f)Review policies and practices with respect to off-balance sheet transactions and trading and hedging activities, and consider the results of any review of these areas by the internal auditors or the external auditors.
(g)Ensure that the Corporation’s presentation of hydrocarbon reserves has been reviewed with the Safety, Sustainability and Reserves Committee of the Board.
(h)Review management’s processes in place to prevent and detect fraud.
(i)Review:
(i)procedures for the receipt, retention and treatment of complaints received by the Corporation, including confidential, anonymous submissions by employees of the Corporation, regarding accounting, internal accounting controls or auditing matters; and
(ii)a summary of any significant investigations regarding such matters.
(j)Meet on a periodic basis separately with management.
18.External Auditors
(a)Be directly responsible, in the Committee’s capacity as a committee of the Board and subject to the rights of shareholders and applicable law, for the appointment, compensation, retention and oversight of the work of the external auditors (including resolution of disagreements between management and the external auditors regarding financial reporting) for the purpose of preparing or issuing an audit report, or performing other audit, review or attest services for the Corporation. The external auditors shall report directly to the Committee.
(b)Meet on a regular basis with the external auditors (without management present) and have the external auditors be available to attend Committee meetings or portions thereof at the request of the Chair or by a majority of the members of the Committee.
(c)Review and discuss a report from the external auditors at least quarterly regarding:
(i)All critical accounting policies and practices to be used;
(ii)All alternative treatments within accounting principles for policies and practices related to material items that have been discussed with management, including the ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the external auditors; and
(iii)Other material written communications between the external auditors and management, such as any management letter or schedule of unadjusted differences.
(d)Obtain and review a report from the external auditors at least annually regarding:
(i)The external auditors’ internal quality-control procedures.
(ii)Any material issues raised by the most recent internal quality-control review, or peer review, of the external auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the external auditors, and any steps taken to deal with those issues.
(iii)To the extent contemplated in the following paragraph, all relationships between the external auditors and the Corporation.
(e)Review and discuss at least annually with the external auditors all relationships that the external auditors and their affiliates have with the Corporation and its affiliates in order to determine the external auditors’ independence, including, without limitation, (i) receiving and reviewing, as part of the report described in the preceding paragraph, a formal written statement from the external auditors delineating all relationships that may reasonably be thought to bear on the independence of the external auditors with respect to the Corporation and its affiliates, (ii) discussing with the external auditors any disclosed relationships or services that the external auditors believe may affect the objectivity and independence of the external auditors, and (iii) recommending that the Board take appropriate action in response to the external auditors’ report to satisfy itself of the external auditors’ independence.
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(f)Review and evaluate annually:
(i)The external auditors’ and the lead partner of the external auditors’ team’s performance, and make a recommendation to the Board regarding the reappointment of the external auditors at the annual meeting of the Corporation’s shareholders or regarding the discharge of such external auditors.
(ii)The terms of engagement of the external auditors together with their proposed fees.
(iii)External audit plans and results.
(iv)Any other related audit engagement matters.
(v)The engagement of the external auditors to perform non-audit services, together with the fees therefor, and the impact thereof, on the independence of the external auditors.
(vi)The Annual Report of the Canadian Public Accountability Board (“CPAB”) concerning audit quality in Canada and discuss implications for Cenovus.
(vii)Any reports issued by CPAB regarding the audit of Cenovus.
(g)Conduct periodically a comprehensive review of the external auditor, with the outcome intended to assist the Committee to identify potential areas for improvement for the audit firm, and to reach a final conclusion on whether the auditor should be reappointed or the audit put out for tender.
(h)Upon reviewing and discussing the information provided to the Committee in accordance with paragraphs 18.(c) through (f), evaluate the external auditors’ qualifications, performance and independence, including whether or not the external auditors’ quality controls are adequate and the provision of permitted non-audit services is compatible with maintaining auditor independence, taking into account the opinions of management and the head of internal audit. The Committee shall present to the Board its conclusions in this respect.
(i)Review the rotation of partners on the audit engagement team in accordance with applicable law. Consider whether, in order to assure continuing external auditor independence, it is appropriate to adopt a policy of rotating the external auditing firm on a regular basis.
(j)Set clear hiring policies for the Corporation’s hiring of employees or former employees of the external auditors.
(k)Consider with management and the external auditors the rationale for employing audit firms other than the principal external auditors.
(l)Consider and review with the external auditors, management and the head of internal audit:
(i)Significant findings during the year and management’s responses and follow-up thereto.
(ii)Any difficulties encountered in the course of their audits, including any restrictions on the scope of their work or access to required information, and management’s response.
(iii)Any significant disagreements between the external auditors or internal auditors and management.
(iv)Any changes required in the planned scope of their audit plan.
(v)The resources, budget, reporting relationships, responsibilities and planned activities of the internal auditors.
(vi)The internal audit department mandate.
(vii)Internal audit’s compliance with the Institute of Internal Auditors’ standards.
19.Internal Audit Group and Independence
(a)Meet on a periodic basis separately with the head of internal audit.
(b)Review and concur in the appointment, compensation, replacement, reassignment, or dismissal of the head of internal audit.
(c)Review with the head of internal audit the Internal Audit budget, resource plan, activities, organizational structure of the internal audit function and the qualifications of the internal auditors.
(d)Confirm and assure, annually, the independence of the internal audit group.
(e)Approve the Internal Audit Charter, and the annual Internal Audit Plan.
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(f)Review the performance and effectiveness of the Internal Audit function including conformance with The Institute of Internal Auditors’ International Standards for the Professional Practice of Internal Auditing and the Code of Ethics.
20.Approval of Audit and Non-Audit Services
(a)Review and, where appropriate, approve the provision of all permitted non-audit services (including the fees and terms thereof) in advance of the provision of those services by the external auditors (subject to the de minimus exception for non-audit services described in the Exchange Act or applicable CSA and SEC legislation and regulations, which services are approved by the Committee prior to the completion of the audit).
(b)Review and, where appropriate and permitted, approve the provision of all audit services (including the fees and terms thereof) in advance of the provision of those services by the external auditors.
(c)If the pre-approvals contemplated in paragraphs 20.(a) and (b) are not obtained, approve, where appropriate and permitted, the provision of all audit and non-audit services promptly after the Committee or a member of the Committee to whom authority is delegated becomes aware of the provision of those services.
(d)Delegate, if the Committee deems necessary or desirable, to subcommittees consisting of one or more members of the Committee, the authority to grant the pre-approvals and approvals described in paragraphs 20.(a) through (c). The decision of any such subcommittee to grant pre-approval shall be presented to the full Committee at the next scheduled Committee meeting.
(e)Establish policies and procedures for the pre-approvals described in paragraphs 20.(a) and (b) so long as such policies and procedures are detailed as to the particular service, the Committee is informed of each service and such policies and procedures do not include delegation to management of the Committee’s responsibilities under the Exchange Act or applicable CSA and SEC legislation and regulations.
21.Risk Oversight
The Committee is responsible for oversight of and reports to the Board about risks related to:
(a)The design and operating effectiveness of the Corporation’s market risk management control framework and the processes to manage such risks;
(b)Non-compliance with regulations and policies relating to matters within the Committee’s mandate;
(c)All financial filings and public documents, including the Corporation’s and any subsidiary with public securities’ annual audited financial statements and related documents, and all unaudited financial statements and related documents, and other filings and public documents as to financial information;
(d)The evaluation, appointment, compensation, retention and work of the external auditors;
(e)Together with management, the appointment, compensation, replacement, reassignment, or dismissal of the head of internal audit;
(f)The receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls, or auditing matters;
(g)Significant financial risks or exposures, including those related to environmental, social and governance (“ESG”) matters, such as climate change; and
(h)Such principal or emerging risks that have been assigned to the Committee, from time to time, by the Board, as recommended by the Governance Committee.
22.Environmental, Social and Governance (ESG) Oversight
The Committee is responsible for oversight of:
(a)The financial impacts from evolving ESG matters (including climate change) and in particular impacts on the Corporation’s access to capital from its lenders, debt investors, and equity investors, its access to insurance coverage, and to its credit ratings.
23.Miscellaneous
(a)The Committee, upon approval by a majority of the members of the Committee, may engage outside advisors if deemed advisable;
(b)The Committee, upon approval by a majority of the members of the Committee, may delegate its duties and responsibilities to subcommittees of the Committee;
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(c)Review with the President & Chief Executive Officer and subject to the concurrence of the Committee, recommend to the Board the appointment, replacement, reassignment, or dismissal of the Chief Financial Officer;
(d)Conduct or authorize investigations into any matters within the Committee’s scope of responsibilities. The Committee shall be empowered to retain, obtain advice or otherwise receive assistance from independent counsel, accountants, or others to assist it in the conduct of any investigation as it deems necessary and the carrying out of its duties;
(e)Determine the appropriate funding for payment by the Corporation (i) of compensation to the external auditors for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Corporation, (ii) of compensation to any advisors employed by the Committee, and (iii) of ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties;
(f)Review and reassess the adequacy of this mandate annually and recommend any proposed changes to the Governance Committee for consideration;
(g)Consider for implementation any recommendations of the Governance Committee of the Board with respect to the Committee’s effectiveness, structure or processes;
(h)Perform such other functions as required by law, the Corporation’s by-laws or the Board; and
(i)Consider any other matters referred to it by the Board.
The duties and responsibilities of a Committee member are in addition to those duties set out for a Board member.
Revised Effective: July 28, 2021
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Document
Exhibit 99.2
Cenovus Energy Inc.
Management’s Discussion and Analysis (unaudited)
For the Year Ended December 31, 2023
(Canadian Dollars)
MANAGEMENT’S DISCUSSION AND ANALYSIS
| For the year ended December 31, 2023 | |
|---|---|
| OVERVIEW OF CENOVUS | 3 |
| --- | --- |
| YEAR IN REVIEW | 3 |
| OPERATING AND FINANCIAL RESULTS | 6 |
| COMMODITY PRICES UNDERLYING OUR FINANCIAL RESULTS | 11 |
| OUTLOOK | 14 |
| REPORTABLE SEGMENTS | 17 |
| UPSTREAM | 18 |
| OIL SANDS | 18 |
| CONVENTIONAL | 22 |
| OFFSHORE | 24 |
| DOWNSTREAM | 28 |
| CANADIAN REFINING | 28 |
| U.S. REFINING | 30 |
| CORPORATE AND ELIMINATIONS | 33 |
| QUARTERLY RESULTS | 35 |
| OIL AND GAS RESERVES | 38 |
| LIQUIDITY AND CAPITAL RESOURCES | 39 |
| RISK MANAGEMENT AND RISK FACTORS | 44 |
| CRITICAL ACCOUNTING JUDGMENTS, ESTIMATION UNCERTAINTIES AND ACCOUNTING POLICIES | 62 |
| CONTROL ENVIRONMENT | 65 |
| ADVISORY | 65 |
| ABBREVIATIONS | 68 |
| SPECIFIED FINANCIAL MEASURES | 69 |
| PRIOR PERIOD REVISIONS | 79 |
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, joint arrangements, and partnership interests held directly or indirectly by, Cenovus Energy Inc.) dated February 14, 2024, should be read in conjunction with our December 31, 2023 audited Consolidated Financial Statements and accompanying notes (“Consolidated Financial Statements”). All of the information and statements contained in this MD&A are made as of February 14, 2024, 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 Audit Committee of the Cenovus Board of Directors (“the Board”), reviewed and recommended the MD&A for approval by the Board, which occurred on February 14, 2024. Additional information about Cenovus, including our quarterly and annual reports, Annual Information Form (“AIF”) and Form 40-F, is available on SEDAR+ at sedarplus.ca, 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, do not constitute part of this MD&A.
Basis of Presentation
This MD&A and the Consolidated Financial Statements were prepared in Canadian dollars, (which includes references to “dollar” or “$”), except where another currency is indicated, and in accordance with International Financial Reporting Accounting 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.
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| OVERVIEW OF CENOVUS | |
| --- |
We are a Canadian-based integrated energy company headquartered in Calgary, Alberta. We are one of the largest Canadian-based crude oil and natural gas producers, with upstream operations in Canada and the Asia Pacific region, and one of the largest Canadian-based refiners and upgraders, with downstream operations in Canada and the United States (“U.S.”).
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, refine, transport and market crude oil, natural gas and refined petroleum products in Canada and internationally. Our physically and economically 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, natural gas and NGLs production through to the sale of finished products such as transportation fuels.
For a description of our business segments see the Reportable Segments section of this MD&A.
Our Strategy
At Cenovus, our purpose is to energize the world to make people’s lives better. Our strategy is focused on maximizing shareholder value over the long-term through sustainable, low-cost, diversified and integrated energy leadership. Our five strategic objectives include delivering top-tier safety performance and sustainability leadership; maximizing value through competitive cost structures and optimizing margins; a focus on financial discipline, including reaching and maintaining targeted debt levels while positioning Cenovus for resiliency through commodity price cycles; a disciplined approach to allocating capital to projects that generate returns at the bottom of the commodity price cycle; and the prioritization of Free Funds Flow generation through all price cycles to manage our balance sheet, increase shareholder returns through dividend growth and common share purchases, reinvest in our business, and diversify our portfolio.
On December 14, 2023, we released our 2024 budget focused on disciplined capital investment and balancing growth of our base business with meaningful shareholder returns. We will remain focused on safe operations, reducing costs, capital discipline and realizing the full value of our integrated business. For further details, see the Outlook section of this MD&A and our 2024 Corporate Guidance dated December 13, 2023, available on our website at cenovus.com.
| YEAR IN REVIEW |
|---|
In 2023, we achieved a number of operational milestones, further enhanced our integrated operations and delivered significant returns to shareholders.
•Delivered safe and reliable upstream performance. Upstream production averaged 778.7 thousand BOE per day, compared with 786.2 thousand BOE per day in 2022. In the Conventional segment, we quickly and safely responded to significant wildfire activity that started in the second quarter. In the Oil Sands segment, our performance was impacted by lower production in the first half of the year as we prepared for the start-up of new wells pads. We were able to regain momentum in the last half of the year. Upstream production averaged 808.6 thousand BOE per day in the fourth quarter, our highest quarterly average since the fourth quarter of 2021.
•Achieved Offshore milestones. We materially progressed the West White Rose project to deliver first oil in 2026. Construction is approximately 75 percent complete, and we reached a major milestone on the project in the second quarter with the completion of the conical slip form operation for the concrete gravity structure. The Terra Nova floating production, storage and offloading unit (“FPSO”) returned to the field in August and began producing in late November. We also achieved first gas production from the MAC field in Indonesia in September.
•Further integrated our heavy oil production and refining capabilities. In February, we acquired the remaining 50 percent interest in the Toledo Refinery from BP Products North America Inc. (“bp”), providing us full ownership and operatorship of the refinery (the “Toledo Acquisition”). We safely returned the refinery to full operations in June. At the Superior Refinery, we continued to progress towards a return to full operations. The Toledo Acquisition and the start-up of the Superior Refinery added approximately 129.0 thousand barrels per day of refining capacity, of which 79.0 thousand barrels per day is heavy oil refining capacity.
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•Safe and strong Canadian Refining performance. In 2023, average crude oil unit throughput (or “throughput”) increased 7.8 thousand barrels per day to 100.7 thousand barrels per day, and crude utilization was 91 percent (2022 – 84 percent). Average refined product production increased 9.0 thousand barrels per day to 114.2 thousand barrels per day. The increases in throughput and refined product production were due to limited downtime and reliable operations.
•U.S. Refining operations. Average throughput increased 58.9 thousand barrels per day to 459.7 thousand barrels per day in 2023. Crude utilization was 75 percent (2022 – 80 percent) and refined product production averaged 485.0 thousand barrels per day, an increase of 65.1 thousand barrels per day from 2022. The increases in throughput and refined product production were mainly driven by the Toledo and Superior refineries discussed above. The increases were partially offset by unplanned outages and planned maintenance across our operated and non-operated assets.
•Reduced long-term debt. We purchased US$1.0 billion of long-term debt in the third quarter at a discount of $84 million. In 2023 compared with 2022, long-term debt decreased $1.6 billion to $7.1 billion and Net Debt increased $778 million to $5.1 billion at December 31, 2023. In 2023, we strengthened our credit ratings with a rating upgrade from Finch Ratings Inc. to BBB Stable and improved outlooks from S&P Global Ratings and Moody’s Investors Service from Stable to Positive.
•Delivered significant cash returns to shareholders. We returned $2.8 billion to shareholders, composed of the purchase of 43.6 million common shares for $1.1 billion through our NCIB, $1.0 billion through common share base dividends and preferred share dividends, and $711 million for the purchase and cancellation of 45.5 million Cenovus Warrants. On February 14, 2024, the Board declared a first quarter base dividend of $0.140 per common share and dividends for our preferred shares of $9 million.
•Generated $8.8 billion in Adjusted Funds Flow. Cash flow from operating activities was $7.4 billion (2022 – $11.4 billion) and Adjusted Funds Flow was $8.8 billion (2022 – $11.0 billion), primarily reflecting a weaker commodity price environment. Brent and WTI both decreased 18 percent, to US$82.62 per barrel and US$77.62 per barrel, respectively, and WCS at Hardisty decreased 22 percent to US$58.97 per barrel compared with 2022. Benchmark refined product pricing also fell compared with 2022, with diesel pricing decreasing 24 percent and gasoline pricing decreasing 19 percent. The Chicago 3-2-1 crack spread declined 29 percent to US$24.19 per barrel.
•Pathways Alliance advances. Engineering, subsurface evaluation and environmental field work for the proposed carbon capture and storage (“CCS”) project was completed in preparation for filing regulatory applications in the first half of 2024. If completed, the CCS project will be one of the world’s largest CCS networks and play an essential role in helping Canada progress its net zero ambitions.
January 1, 2024, marked the third anniversary of the closing of the transaction to combine Cenovus and Husky Energy Inc. (“Husky”). We have made significant progress advancing our strategy to maximize shareholder value through safe operations, the integration of our assets, cost and sustainability leadership, financial discipline, and Free Funds Flow growth. Over the three years we reduced long-term debt by $6.9 billion and reduced Net Debt by $8.0 billion. We have returned $6.7 billion to shareholders through our shareholder returns strategy, including the purchase and cancellation of 173.1 million common shares through our NCIB, the purchase and cancellation of 45.5 million Cenovus Warrants, and payment of dividends. We further integrated our assets through strategic acquisitions and completed the Superior Refinery rebuild. Lastly, we developed and are progressing work around our ambitious ESG targets.
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Summary of Annual Results
| ($ millions, except where indicated) | 2023 | 2022 | 2021 |
|---|---|---|---|
| Upstream Production Volumes (1) (MBOE/d) | 778.7 | 786.2 | 791.5 |
| Downstream Crude Oil Unit Throughput (2) (Mbbls/d) | 560.4 | 493.7 | 508.0 |
| Downstream Production Volumes (Mbbls/d) | 599.2 | 525.1 | 537.7 |
| Revenues | 52,204 | 66,897 | 46,357 |
| Operating Margin (3) | 11,022 | 14,263 | 9,373 |
| Cash From (Used In) Operating Activities | 7,388 | 11,403 | 5,919 |
| Adjusted Funds Flow (3) | 8,803 | 10,978 | 7,248 |
| Per Share – Basic (3) ($) | 4.64 | 5.63 | 3.59 |
| Per Share – Diluted (3) ($) | 4.57 | 5.47 | 3.54 |
| Capital Investment | 4,298 | 3,708 | 2,563 |
| Free Funds Flow (3) | 4,505 | 7,270 | 4,685 |
| Net Earnings (Loss) (4) | 4,109 | 6,450 | 587 |
| Per Share – Basic ($) | 2.15 | 3.29 | 0.27 |
| Per Share – Diluted ($) | 2.12 | 3.20 | 0.27 |
| Total Assets | 53,915 | 55,869 | 54,104 |
| Total Long-Term Liabilities | 18,993 | 20,259 | 23,191 |
| Long-Term Debt, Including Current Portion | 7,108 | 8,691 | 12,385 |
| Net Debt | 5,060 | 4,282 | 9,591 |
| Cash Returns to Shareholders | 2,798 | 3,457 | 475 |
| Common Shares – Base Dividends | 990 | 682 | 176 |
| Base Dividends Per Common Share ($) | 0.525 | 0.350 | 0.088 |
| Common Shares – Variable Dividends | — | 219 | — |
| Variable Dividends Per Common Share ($) | — | 0.114 | — |
| Purchase of Common Shares Under NCIB | 1,061 | 2,530 | 265 |
| Payment for Purchase of Warrants | 711 | — | — |
| Preferred Share Dividends | 36 | 26 | 34 |
(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)Non-GAAP financial measure or contains a non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
(4)Net earnings (loss) for all periods in the table above is the same as net earnings (loss) from continuing operations.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 5 |
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| OPERATING AND FINANCIAL RESULTS | |
| --- |
Selected Operating Results and Oil and Gas Reserves — Upstream
| Percent Change | |||||
|---|---|---|---|---|---|
| 2023 | 2022 | ||||
| Upstream Production Volumes by Segment (1) (MBOE/d) | |||||
| Oil Sands | 595.4 | 1 | 588.7 | ||
| Conventional | 119.9 | (6) | 127.2 | ||
| Offshore | 63.4 | (10) | 70.3 | ||
| Total Production Volumes | 778.7 | (1) | 786.2 | ||
| Upstream Production Volumes by Product | |||||
| Bitumen (Mbbls/d) | 576.7 | 1 | 570.3 | ||
| Heavy Crude Oil (Mbbls/d) | 16.7 | 2 | 16.3 | ||
| Light Crude Oil (Mbbls/d) | 14.1 | (26) | 19.1 | ||
| NGLs (Mbbls/d) | 32.5 | (10) | 36.2 | ||
| Conventional Natural Gas (MMcf/d) | 832.6 | (4) | 866.1 | ||
| Total Production Volumes (MBOE/d) | 778.7 | (1) | 786.2 | ||
| Oil and Gas Reserves (MMBOE) | |||||
| Total Proved | 5,866 | (4) | 6,082 | ||
| Probable | 2,836 | 2 | 2,787 | ||
| Total Proved Plus Probable | 8,702 | (2) | 8,869 |
(1)Refer to the Oil Sands, Conventional or Offshore Reportable Segments section of this MD&A for a summary of production by product type.
Production
In 2023, total upstream production decreased slightly from 2022. The factors below increased production in 2023 compared with 2022:
•Higher production from our Oil Sands assets mainly due to the acquisition of the remaining 50 percent interest in the Sunrise Oil Sands Partnership (“SOSP”, “Sunrise” or the “Sunrise Acquisition”) from BP Canada Energy Group ULC (“bp Canada”) on August 31, 2022, and successful results from the 2023 redevelopment program. Partially offsetting the increase was lower production at Christina Lake resulting from the timing of new wells pads in 2023.
•First gas production at the MBH and MDA fields in Indonesia in the fourth quarter of 2022, and from the MAC field in the third quarter of 2023.
The factors below decreased production in 2023 compared with 2022:
•The temporary shut-in of a significant portion of production in our Conventional operations in response to wildfire activity in the second quarter of 2023.
•Changes to the Liwan 3-1 gas sales agreement in China in the second quarter of 2022, concluding the amendment that temporarily increased sales volumes.
•A temporary unplanned outage in China in the second quarter of 2023, related to the disconnection of the umbilical by a third-party vessel in early April, reconnected in May.
Oil and Gas Reserves
Based on our reserves reports prepared by independent qualified reserves evaluators (“IQREs”), total proved reserves and total proved plus probable reserves at December 31, 2023 were approximately 5.9 billion BOE and 8.7 billion BOE, respectively. Total proved reserves decreased four percent from 2022, and proved plus probable reserves decreased two percent from 2022.
Additional information about our reserves is included in the Oil and Gas Reserves section of this MD&A.
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Selected Operating Results — Downstream
| Percent Change | |||||
|---|---|---|---|---|---|
| 2023 | 2022 | ||||
| Downstream Crude Oil Unit Throughput (Mbbls/d) | |||||
| Canadian Refining | 100.7 | 8 | 92.9 | ||
| U.S. Refining | 459.7 | 15 | 400.8 | ||
| Total Crude Oil Unit Throughput | 560.4 | 14 | 493.7 | ||
| Downstream Production Volumes (1) (Mbbls/d) | |||||
| Canadian Refining | 114.2 | 9 | 105.2 | ||
| U.S. Refining | 485.0 | 16 | 419.9 | ||
| Total Downstream Production | 599.2 | 14 | 525.1 |
(1)Refer to the Canadian Refining and U.S. Refining Reportable Segments section of this MD&A for a summary of production by product type.
The Canadian Refining assets ran well in 2023 with crude utilization at the Upgrader and Lloydminster Refinery of 90 percent and 95 percent, respectively (2022 – 84 percent and 83 percent, respectively). The improved performance was driven by consistent operations in 2023, compared with planned turnarounds and temporary unplanned outages in 2022 at both assets. The increases were partially offset by unplanned outages at the Upgrader in the second and fourth quarters of 2023.
In our U.S. Refining operations, crude throughput increased by 58.9 thousand barrels per day as we:
•Closed the acquisition of the remaining 50 percent of the Toledo Refinery, increasing our throughput capacity by 80.0 thousand barrels per day.
•Safely restarted the Toledo Refinery. The Refinery was fully operational by the end of June and the utilization rate was 88 percent in the last half of the year. Utilization for the full year was 57 percent (2022 – 45 percent).
•Made significant progress towards a return to full operations at the Superior Refinery after being shut down since 2018. We introduced crude oil in mid-March and safely restarted the fluid catalytic cracking unit (“FCCU”) in early October. During the last half of the year crude utilization was 66 percent.
•Had strong performance from the Wood River Refinery. In addition, planned turnaround activity in 2022 had a greater impact than the planned spring 2023 turnaround. Combined utilization at the Wood River and Borger refineries was 81 percent (2022 – 83 percent).
The increases were partially offset by:
•Planned turnarounds and temporary unplanned outages at the Borger Refinery that had a larger impact than the unplanned outages and turnaround completed in 2022.
•Unplanned outages combined with planned maintenance at the Lima Refinery in the second half of 2023. Crude utilization at the Lima Refinery in 2023 was 85 percent (2022 – 90 percent).
•In the fourth quarter of 2023, we flexed throughput at our U.S. refineries to optimize our margins as a result of significantly lower refining benchmark pricing.
Selected Consolidated Financial Results
Revenues
Revenues decreased 22 percent to $52.2 billion from 2022 primarily due to lower blended crude oil benchmark pricing impacting our Oil Sands segment, and lower natural gas and refined product benchmark pricing, partially offset by a weaker Canadian dollar on average relative to the U.S. dollar.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 7 |
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Operating Margin
Operating Margin is a specified financial measure and is used to provide a consistent measure of the cash generating performance of our assets for comparability of our underlying financial performance between periods.
| ($ millions) | 2023 | 2022 |
|---|---|---|
| Gross Sales (1) | 63,708 | 79,152 |
| Less: Royalties | 3,270 | 4,868 |
| Revenues (1) | 60,438 | 74,284 |
| Expenses | ||
| Purchased Product (1) | 31,425 | 39,150 |
| Transportation and Blending (1) | 11,088 | 12,301 |
| Operating Expenses | 6,891 | 6,839 |
| Realized (Gain) Loss on Risk Management Activities | 12 | 1,731 |
| Operating Margin | 11,022 | 14,263 |
(1)Comparative periods reflect certain revisions. See Note 39 of the Consolidated Financial Statements and Prior Period Revisions found in the Advisory section of this MD&A for further details.
Operating Margin by Segment
Years Ended December 31, 2023 and 2022
Operating Margin decreased $3.2 billion to $11.0 billion in 2023 compared with 2022, primarily due to:
•Lower realized crude oil and NGLs sales prices resulting from lower benchmark pricing.
•Decreased gross margin from the U.S. Refining segment resulting from lower market crack spreads.
•Lower sales volumes from our Offshore segment.
•Higher non-fuel operating expenses from the Oil Sands segment. Oil Sands per-unit non-fuel operating expenses increased 15 percent from 2022 to $8.94 per barrel in 2023, primarily due to higher repairs and maintenance costs as a result of planned turnarounds at Foster Creek and Christina Lake, and lower gross sales volumes.
•A rise in operating expenses in the U.S. Refining segment, primarily due to the Toledo acquisition and the start-up of both the Superior and Toledo refineries.
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These decreases in Operating Margin were partially offset by:
•Significantly lower realized risk management losses in 2023, compared with 2022.
•Lower royalties in the Oil Sands and Conventional segments, resulting from lower crude oil and natural gas benchmark pricing.
•Higher throughput and refined product production primarily from the Toledo and Superior refineries as discussed above.
Operating Margin in the Conventional segment decreased compared with 2022, primarily due to lower realized natural gas prices. The decrease was generally offset by reduced fuel operating costs in the Oil Sands and Canadian Refining segments on natural gas purchased from the Conventional segment.
Cash From (Used in) Operating Activities and Adjusted Funds Flow
Adjusted Funds Flow is a non-GAAP financial measure commonly used in the oil and gas industry to assist in measuring a company’s ability to finance its capital programs and meet its financial obligations.
| ($ millions) | 2023 | 2022 |
|---|---|---|
| Cash From (Used in) Operating Activities | 7,388 | 11,403 |
| (Add) Deduct: | ||
| Settlement of Decommissioning Liabilities | (222) | (150) |
| Net Change in Non-Cash Working Capital | (1,193) | 575 |
| Adjusted Funds Flow | 8,803 | 10,978 |
Cash from operating activities decreased in 2023 compared with 2022. The decline was primarily due to a lower Operating Margin as discussed above and changes in non-cash working capital, partially offset by $631 million paid in 2022 for the contingent payment associated with the acquisition of 50 percent of the FCCL Partnership. The net change in non-cash working capital in 2023 was $1.2 billion, mainly due to the settlement of a $1.2 billion income tax liability in the first quarter of 2023.
Adjusted Funds Flow was lower in 2023 compared with 2022, primarily due to decreased Operating Margin.
Net Earnings (Loss)
Net earnings in 2023 was $4.1 billion compared with $6.5 billion in 2022. The decrease was primarily due to lower Operating Margin as discussed above, in addition to:
•The revaluation gain related to the Sunrise Acquisition in 2022.
•Lower other income in 2023 primarily due to the 2022 insurance proceeds related to the 2018 incidents at the Superior Refinery and in the Atlantic region.
•Higher net gains on asset divestitures in 2022.
The decreases were partially offset by:
•Lower income tax expense.
•Unrealized foreign exchange gains in 2023 compared with losses in 2022.
•Decreased general and administrative expenses due to lower long-term incentive costs.
•Lower finance costs due to the purchase of unsecured notes in 2022 and the third quarter of 2023.
•Decreased losses on the re-measurement of contingent payments.
Net Debt
| As at ($ millions) | December 31, 2023 | December 31, 2022 |
|---|---|---|
| Short-Term Borrowings | 179 | 115 |
| Current Portion of Long-Term Debt | — | — |
| Long-Term Portion of Long-Term Debt | 7,108 | 8,691 |
| Total Debt | 7,287 | 8,806 |
| Less: Cash and Cash Equivalents | (2,227) | (4,524) |
| Net Debt | 5,060 | 4,282 |
Long-term debt decreased by $1.6 billion from December 31, 2022, primarily due to the purchase of unsecured notes with an aggregate principal amount of US$1.0 billion in the third quarter of 2023. Net Debt increased by $778 million from December 31, 2022, mainly due to cash from operating activities of $7.4 billion, capital investment of $4.3 billion, acquisitions of $515 million and cash returns to shareholders of $2.8 billion.
For further details see the Liquidity and Capital Resources section of this MD&A.
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Capital Investment (1)
| ($ millions) | 2023 | 2022 | ||
|---|---|---|---|---|
| Upstream | ||||
| Oil Sands | 2,382 | 1,792 | ||
| Conventional | 452 | 344 | ||
| Offshore | 642 | 310 | ||
| Total Upstream | 3,476 | 2,446 | ||
| Downstream | ||||
| Canadian Refining | 145 | 117 | ||
| U.S. Refining | 602 | 1,059 | ||
| Total Downstream | 747 | 1,176 | ||
| Corporate and Eliminations | 75 | 86 | ||
| Total Capital Investment | 4,298 | 3,708 |
(1)Includes expenditures on property, plant and equipment (“PP&E”), exploration and evaluation (“E&E”) assets, and capitalized interest. Excludes capital expenditures related to the HCML joint venture.
Capital investment in 2023 was mainly related to:
•Sustaining activities in the Oil Sands segment, including the drilling of stratigraphic test wells as part of our integrated winter program in the first and fourth quarters, in addition to the tie-back of Narrows Lake to Christina Lake and other growth projects at Foster Creek and Sunrise.
•Drilling, completion, tie-in and infrastructure projects in the Conventional segment.
•The progression of the West White Rose project and Terra Nova asset life extension (“ALE”) project in the Atlantic region.
•The Superior Refinery rebuild and margin improvement and reliability initiatives at the Wood River, Borger, Lima and Toledo refineries.
Drilling Activity
| Net Stratigraphic Test Wells<br><br>and Observation Wells | Net Production Wells (1) | ||||
|---|---|---|---|---|---|
| 2023 | 2022 | 2023 | 2022 | ||
| Foster Creek | 87 | 52 | 44 | 29 | |
| Christina Lake | 53 | — | 27 | 31 | |
| Sunrise | 38 | 15 | 24 | 10 | |
| Lloydminster Thermal | 71 | 98 | 9 | 33 | |
| Lloydminster Conventional Heavy Oil | 3 | 8 | 34 | 11 | |
| Other (2) | 3 | 22 | — | — | |
| 255 | 195 | 138 | 114 |
(1)SAGD well pairs in the Oil Sands segment are counted as a single producing well.
(2)Includes new resource plays.
Stratigraphic test wells were drilled to help identify future well pad locations and to further progress the evaluation of other assets. Observation wells were drilled to gather information and monitor reservoir conditions.
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| (net wells) | Drilled | Completed | Tied-in | Drilled | Completed | Tied-in |
| Conventional | 38 | 37 | 41 | 31 | 35 | 36 |
In the Offshore segment, we drilled and completed one (0.4 net) planned development well at the MAC field in Indonesia in 2023 (2022 – drilled and completed nine (3.6 net) planned development wells at the MBH, MDA and MAC fields in Indonesia).
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 10 |
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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, refined product prices and 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)
| (Average US$/bbl, unless otherwise indicated) | 2023 | Percent Change | 2022 | Q4 2023 | Q3 2023 | Q4 2022 |
|---|---|---|---|---|---|---|
| Dated Brent | 82.62 | (18) | 101.19 | 84.05 | 86.76 | 88.71 |
| WTI | 77.62 | (18) | 94.23 | 78.32 | 82.26 | 82.65 |
| Differential Dated Brent-WTI | 5.00 | (28) | 6.96 | 5.73 | 4.50 | 6.06 |
| WCS at Hardisty | 58.97 | (22) | 76.01 | 56.43 | 69.35 | 56.99 |
| Differential WTI-WCS at Hardisty | 18.65 | 2 | 18.22 | 21.89 | 12.91 | 25.66 |
| WCS at Hardisty (C$/bbl) | 79.59 | (19) | 98.51 | 76.95 | 93.06 | 77.42 |
| WCS at Nederland | 69.74 | (19) | 85.77 | 71.59 | 77.89 | 67.65 |
| Differential WTI-WCS at Nederland | 7.88 | (7) | 8.46 | 6.73 | 4.37 | 15.00 |
| Condensate (C5 at Edmonton) | 76.61 | (18) | 93.78 | 76.24 | 77.96 | 83.40 |
| Differential Condensate-WTI Premium/(Discount) | (1.01) | (124) | (0.45) | (2.08) | (4.30) | 0.75 |
| Differential Condensate-WCS (2) Premium/(Discount) | 17.64 | 1 | 17.77 | 19.81 | 8.61 | 26.41 |
| Condensate (C$/bbl) | 103.43 | (15) | 121.78 | 103.90 | 104.63 | 113.25 |
| Synthetic at Edmonton | 79.61 | (19) | 98.66 | 78.64 | 84.95 | 86.79 |
| Differential Synthetic-WTI Premium/(Discount) | 1.99 | 55 | 4.43 | 0.32 | 2.69 | 4.14 |
| Synthetic at Edmonton (C$/bbl) | 107.47 | (16) | 128.19 | 107.21 | 114.01 | 117.87 |
| Refined Product Prices | ||||||
| Chicago Regular Unleaded Gasoline (“RUL”) | 97.86 | (19) | 120.63 | 83.72 | 105.59 | 102.80 |
| Chicago Ultra-low Sulphur Diesel (“ULSD”) | 109.70 | (24) | 143.85 | 107.24 | 113.77 | 140.95 |
| Refining Benchmarks | ||||||
| Chicago 3-2-1 Crack Spread (3) | 24.19 | (29) | 34.15 | 13.24 | 26.06 | 32.87 |
| Group 3 3-2-1 Crack Spread (3) | 29.66 | (11) | 33.21 | 18.55 | 36.96 | 29.99 |
| Renewable Identification Numbers (“RINs”) | 7.04 | (9) | 7.72 | 4.77 | 7.42 | 8.54 |
| Natural Gas Prices | ||||||
| AECO (4) (C$/Mcf) | 2.64 | (50) | 5.31 | 2.30 | 2.60 | 5.11 |
| NYMEX (5) (US$/Mcf) | 2.74 | (59) | 6.64 | 2.88 | 2.55 | 6.26 |
| Foreign Exchange Rates | ||||||
| US$ per C$1 - Average | 0.741 | (4) | 0.769 | 0.734 | 0.746 | 0.737 |
| US$ per C$1 - End of Period | 0.756 | 2 | 0.738 | 0.756 | 0.740 | 0.738 |
| RMB per C$1 - Average | 5.247 | 1 | 5.170 | 5.304 | 5.402 | 5.241 |
(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)WCS at Hardisty.
(3)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.
(4)Alberta Energy Company ("AECO") 5A natural gas daily index.
(5)NYMEX natural gas monthly index.
Crude Oil and Condensate Benchmarks
Crude oil benchmark prices, Brent and WTI, have trended lower in 2023 compared with 2022. In 2023, we saw a more balanced crude market, resulting in average prices falling from elevated levels in 2022. Global demand growth remained healthy in 2023 despite macroeconomic concerns, but was outpaced by high supply growth from non-OPEC+ countries. Repeated and extended cuts to OPEC+ production quotas have offset production growth elsewhere and supported prices. In the first half of 2022, prices were high as a result of rising global demand amid low global inventories and limited crude production spare capacity, which was exacerbated by risks related to Russian export supply shortfall uncertainty. Prices then decreased gradually in the second half of 2022 as material Russian supply disruption concerns eased and nearly all short-term supply sources were accessed to meet demand, including unprecedented releases of U.S. government strategic petroleum reserves (“SPRs”).
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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 narrowed in 2023 compared with 2022. In 2022, the differential widened significantly in the months following the Russian invasion of Ukraine in February 2022.
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. On a full-year basis, the average WTI-WCS differential at Hardisty in 2023 was consistent with 2022. Transportation costs reflected pipeline economics in 2022 and 2023 as supply largely remained within export capacity. WCS differentials widened in the fourth quarter of 2023, most notably in December. The widening in the fourth quarter was due to high production and outages at Alberta refineries leading to exports above pipeline capacity. The WCS quality differential was consistent year-over-year, as differentials widened in the second half of 2022 and the first half of 2023 as a result of unplanned refinery maintenance, high global refining utilization, rising supply of medium and heavy oil barrels into the market from OPEC+, releases of SPRs and volatile refined product pricing.
WCS at Nederland is a heavy oil benchmark for sales of our product at the USGC. The WTI-WCS at Nederland differential is representative of the heavy oil quality discount and is influenced by global heavy oil refining capacity and global heavy oil supply. The WTI-WCS at Nederland differential in 2023 declined from 2022, due to the same factors impacting the WTI-WCS differential at Hardisty discussed above.
In Canada, we upgrade heavy crude oil and bitumen into a sweet synthetic crude oil, the Husky Synthetic Blend (“HSB”), at the 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.
In 2023, synthetic crude at Edmonton was at a lower premium to WTI compared with 2022. Synthetic crude prices were elevated in 2022 as a result of upgrader maintenance in Western Canada and strong refinery demand for light crude oil. High upgrader production in 2023 resulted in this premium eroding. The synthetic crude premium to WTI declined in the fourth quarter relative to the third quarter of 2023 as a result of exports above pipeline capacity on light crude pipelines and limited local storage capacity.
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 20 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. On a full-year basis, the average Condensate-WCS differential in 2023 was consistent with 2022. Edmonton condensate differentials are highly seasonal, typically trading at a premium to WTI during peak winter demand and a discount to WTI during the summer months. This is counter-seasonal to the WTI-WCS differential, often resulting in the WCS-Condensate differential experiencing wide swings between summer and winter.
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In 2023 and 2022, the average Edmonton condensate benchmark was near parity with WTI as demand for heavy crude blending in Alberta has been strong and condensate supply remains tight.
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 the Toledo, Lima and Wood River refineries. The Group 3 3-2-1 market crack spread reflects the market for the Superior and Borger refineries.
Refined product prices declined in 2023 compared with 2022. Market crack spreads also declined during this period as 2022 saw periods of historically high refined product prices and refining margins due to pandemic refinery rationalization, Russian export volatility and critically low global inventories of refined products.
Reduced refinery outages and incremental global capacity additions resulted in declining refined product prices relative to WTI in 2023, compared with 2022, but crack spreads remained above historical norms. Diesel margins declined year-over-year but were high on average amid strong demand, tight global supply and demand balances, and continued low inventories. Gasoline margins were strong on average in 2023 but weakened in the fourth quarter as seasonally lower demand and high refinery utilization resulted in excess supply and high inventory builds. Gasoline and diesel margins, and crack spreads, decreased significantly in December. The Chicago refined product market saw periods of weakness in 2023 relative to Group 3 and the USGC as regional refining utilization was high and waterway maintenance prevented products from being barged to other market demand centers.
On a full-year basis, average RINs costs were consistent in 2023 compared with 2022, but declined in the fourth quarter of 2023 due to growing renewable diesel supply.
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 generally reflects the differential between Brent and WTI benchmark prices.
Our refining margins are affected by many other factors such as the quality and purchase location of crude oil feedstock, refinery configuration and product output, and the time lag between the purchase of feedstock and the product sale, as the feedstock 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.
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Natural Gas Benchmarks
Average NYMEX and AECO natural gas prices decreased significantly in 2023 compared with 2022. Prices were very high in 2022 due to strong U.S. domestic demand and high liquified natural gas exports, coupled with a lagged supply response and strong global pricing amid Russia supply concerns. Prices weakened in 2023 as U.S. supply grew rapidly, reaching record high levels, exceeding demand growth which led to high levels of inventory. The price received for our Asia Pacific natural gas production is largely based on long-term contracts.
Foreign Exchange Benchmarks
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. dollar 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 our U.S. and Asia Pacific operations.
In 2023, the Canadian dollar on average weakened relative to the U.S. dollar compared with 2022, positively impacting our reported revenues. The Canadian dollar strengthened slightly relative to the U.S. dollar as at December 31, 2023, compared with December 31, 2022, resulting in unrealized foreign exchange gains on the translation of our U.S. dollar debt.
A portion of our long-term sales contracts in the Asia Pacific region 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 2023, the Canadian dollar on average strengthened slightly relative to RMB compared with 2022, negatively impacting our reported revenues.
Interest Rate Benchmarks
Our interest income, short-term borrowing costs, reported decommissioning liabilities and fair value measurements are impacted by fluctuations in interest rates. A change in interest rates could change our net interest expense and affect how certain liabilities are measured and impact our cash flow and financial results.
As at December 31, 2023, the Bank of Canada’s Policy Interest Rate was 5.00 percent, an increase from 4.25 percent on December 31, 2022, due to concerns over inflation. On January 24, 2024, the Bank of Canada announced the rate will remain at 5.00 percent.
| OUTLOOK |
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Commodity Price Outlook
Global crude oil prices traded in a narrower range in 2023 compared with 2022, but remained volatile following the EU import ban on Russia’s crude oil and products and subsequent reshuffling of global trade flows, global macro-economic concerns related to rising interest rates and inflation, and geopolitical events such as the crisis in Israel and Gaza. In 2022, global crude oil prices spiked in the first half of the year following Russia’s invasion of Ukraine as low global spare production capacity stoked fears of supply scarcity. Prices gradually declined in the second half of 2022 as nearly all short-term supply sources were called on, and Russian exports remained resilient. Crude oil demand growth was ultimately strong in 2023 despite weak macroeconomic indicators, supported by the lifting of China’s COVID-19 restrictions earlier in the year. High supply growth from non-OPEC+ put downward pressure on prices through the year; however, the OPEC+ announced and extended production cuts have managed and supported the downward pressure from supply growth. OPEC+ policy remains crucial to global oil balances and prices.
Crude oil price trajectory remains uncertain and volatile amid a market with unpredictable key drivers and government policy playing a large role in supply and demand dynamics. Policies regarding Russia, Iran and Venezuela are among key factors that will drive energy supply and shift global trade patterns. The OPEC+ announced extension of production cuts that will continue to be supportive of pricing, with production quotas being a key driver of crude oil prices. Overall, we expect the general outlook for crude oil and refined product prices will be volatile and impacted by OPEC+ policy, the duration and severity of the ongoing Russian invasion of Ukraine, the extent to which Russian exports are reduced by sanctions or production cuts, the pace of non-OPEC+ supply growth, the refilling of SPRs, and the crisis in Israel and Gaza. In addition, weakening global economic activity, inflation and interest rate uncertainty, and the potential for a recession remain a risk to the pace of demand growth.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 14 |
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In addition to the above, our commodity pricing outlook for the next 12 months is influenced by the following:
•We expect the WTI-WCS at Hardisty differential will remain largely tied to global supply factors and heavy crude oil processing capacity as long as supply stays within Canadian crude oil export capacity. We expect the start-up of the Trans Mountain pipeline expansion in 2024 to have a narrowing impact on WTI-WCS differentials.
•We expect refined product prices and market crack spreads will remain volatile. Economic effects of the ongoing Russian invasion of Ukraine and central bank policies could impact demand. Refined product prices and market crack spreads are likely to continue to fluctuate, adjusting for seasonal trends and refinery utilization in North America.
•NYMEX and AECO natural gas prices are expected to remain under pressure in the near-term due to strong supply and ample natural gas in storage. Weather will continue to be a key driver of demand and impact prices.
•We expect the Canadian dollar to continue to be impacted by 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, crude oil prices and emerging macro-economic factors.
Most of our upstream crude oil and downstream refined product production are exposed to movements in the WTI crude oil price. Our integrated upstream and downstream operations help us to mitigate the impact of commodity price volatility. Crude oil production in our upstream assets is blended with condensate and butane and used as crude oil feedstock by our downstream operations, and condensate extracted from our blended crude oil is sold back to our Oil Sands operations. The restart of the Superior and Toledo refineries provide further physical integration. Both refineries process blended crude oil from our Oil Sands assets and HSB from the Upgrader.
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 spreads in all of these markets. We will continue to monitor market fundamentals and optimize run rates at our refineries accordingly.
Our 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 the majority of our 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.
•Traditional crude oil storage tanks in various geographic locations.
Key Priorities for 2024
Our 2024 priorities are focused on safety, maximizing shareholder value through downstream profitability, advancing major projects and other asset opportunities and cost leadership, and continuing to advocate for our company and industry.
Top-Tier Safety Performance
Safe and reliable operations are our number one priority. We strive to ensure safe and reliable operations across our portfolio, and aim to be best in class operators for each of our major assets and businesses.
Returns to Shareholders Target
Maintaining a strong balance sheet with the resilience to withstand price volatility and capitalize on opportunities throughout the commodity price cycle is a key element of Cenovus’s capital allocation framework. Our ultimate Net Debt Target is $4 billion, which serves as our floor on Net Debt, and we strive to continue to make progress towards this target. 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.
Project Execution
Investing in future growth is a focus for us, with several key projects in flight, including the West White Rose project, the SeaRose FPSO asset life extension project (“SeaRose ALE project”), the Narrows Lake tie-back to Christina Lake and the Foster Creek optimization project. In addition, we have a number of information system upgrades underway in 2024. We plan to execute these multi-year projects on time and budget.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 15 |
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Cost Leadership
We aim to maximize shareholder value through continued focus on cost structures and margin optimization. We are focused on reducing operating, capital and general and administrative costs realizing the full value of our integrated strategy while making decisions that support long-term value for Cenovus.
We will continue to target improved reliability of our downstream assets leveraging our upstream expertise to maximize the long-term profitability of our assets.
Sustainability
Sustainability has always been deeply engrained in Cenovus’s culture. We have established ambitious targets in our five ESG focus areas and continue to progress tangible plans to meet these targets.
We have allocated resources to invest in our five ESG focus areas, including emissions reduction initiatives. We continue to support our commitment to the Pathways Alliance foundational project, including efforts to reach agreements with the federal and provincial governments that provide a sufficient level of fiscal support to progress large-scale decarbonization projects. It is critical that the federal and provincial governments provide support at a level consistent with what other large-scale decarbonization projects are receiving globally. This will enable the Canadian oil and gas sector to achieve its GHG emissions reduction goals and remain competitive with other oil and gas producing jurisdictions.
Additional information on Cenovus’s efforts and targets are available in Cenovus’s 2022 ESG report on our website at cenovus.com.
2024 Corporate Guidance
Our 2024 capital investment budget is between $4.5 billion and $5.0 billion. This includes $3.0 billion directed towards sustaining production and supporting continued safe and reliable operations, and between $1.5 billion and $2.0 billion in optimization and growth capital.
Optimization and growth capital is mainly related to:
•Progressing the West White Rose project.
•Incrementally growing production at the Foster Creek, Christina Lake and Sunrise facilities.
•Initiatives in our downstream business to improve reliability and increase margin capture.
•Opportunities in the Conventional segment.
The following table shows guidance for 2024:
| Capital Investment<br><br>($ millions) | Production<br><br>(MBOE/d) | Crude Oil Unit Throughput<br><br>(Mbbls/d) | |
|---|---|---|---|
| Upstream | |||
| Oil Sands | 2,500 - 2,750 | 590 - 610 | |
| Conventional | 350 - 425 | 120 - 130 | |
| Offshore | 850 - 950 | 60 - 70 | |
| Downstream | 750 - 850 | 630 - 670 | |
| Corporate and Eliminations | 60 - 70 |
Our 2024 guidance dated December 13, 2023, is available on our website at cenovus.com.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 16 |
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| REPORTABLE SEGMENTS | |
| --- |
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, 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. These provide 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 Husky-CNOOC Madura Ltd. (“HCML”), which is engaged in the exploration for and production of NGLs and natural gas in offshore Indonesia.
Downstream Segments
•Canadian Refining, includes the owned and operated Lloydminster upgrading and asphalt refining complex, which converts heavy oil and bitumen into synthetic crude oil, diesel, asphalt and other ancillary products. Cenovus also owns and operates the Bruderheim crude-by-rail terminal and two ethanol plants. The Company’s commercial fuels business across Canada is included in this segment. Cenovus markets its production and third-party commodity trading volumes in an effort to use its integrated network of assets to maximize value. The Company renamed its Canadian Manufacturing segment to Canadian Refining in 2023.
•U.S. Refining, includes the refining of crude oil to produce gasoline, diesel, jet fuel, asphalt and other products at the wholly-owned Lima, Superior and Toledo refineries, and the jointly-owned Wood River and Borger refineries (jointly owned with operator Phillips 66). Cenovus markets some of its own and third-party refined products including gasoline, diesel, jet fuel and asphalt. The Company renamed its U.S. Manufacturing segment to U.S. Refining in 2023.
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 feedstock and internal usage of crude oil, natural gas, condensate, other NGLs and refined products between segments; transloading services provided to the Oil Sands segment by the Company’s crude-by-rail terminal; the sale of condensate extracted from blended crude oil production in the Canadian Refining segment and sold to the Oil Sands segment; and unrealized profits in inventory. Eliminations are recorded based on market prices.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 17 |
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UPSTREAM
Oil Sands
In 2023, we:
•Delivered safe operations.
•Produced 593.4 thousand barrels of crude oil per day (2022 – 586.6 thousand barrels of crude oil per day).
•Started production on three new well pads at both Foster Creek and Christina Lake.
•Completed a planned turnaround at Foster Creek in the second quarter.
•Completed a planned turnaround at Christina Lake in the third quarter with minimal production impacts.
•Generated Operating Margin of $8.2 billion, a decrease of $810 million compared with 2022 primarily due to lower average realized sales prices.
•Invested capital of $2.4 billion primarily for sustaining activities including the drilling of stratigraphic test wells as part of our integrated winter program in the first and fourth quarters, in addition to the tie-back of Narrows Lake to Christina Lake and other growth projects at Foster Creek and Sunrise.
•Averaged a Netback of $38.10 per BOE (2022 – $49.10 per BOE).
Financial Results
| ($ millions) | 2023 | 2022 |
|---|---|---|
| Revenues | ||
| Gross Sales (1) | 26,192 | 34,683 |
| Less: Royalties | 3,059 | 4,493 |
| 23,133 | 30,190 | |
| Expenses | ||
| Purchased Product (1) | 1,457 | 4,718 |
| Transportation and Blending | 10,774 | 12,036 |
| Operating | 2,716 | 2,930 |
| Realized (Gain) Loss on Risk Management | 17 | 1,527 |
| Operating Margin | 8,169 | 8,979 |
| Unrealized (Gain) Loss on Risk Management | 15 | (68) |
| Depreciation, Depletion and Amortization | 2,993 | 2,763 |
| Exploration Expense | 19 | 9 |
| (Income) Loss from Equity-Accounted Affiliates | 6 | 8 |
| Segment Income (Loss) | 5,136 | 6,267 |
(1)Comparative periods reflect certain revisions. See Note 39 of the Consolidated Financial Statements and Prior Period Revisions found in the Advisory section of this MD&A for further details.
Operating Margin Variance
Year Ended December 31, 2023
(1)Reported revenues include the value of condensate sold as heavy oil blend. Condensate costs are recorded in transportation and blending expenses. The crude oil price excludes the impact of condensate purchases. Changes to price include the impact of realized risk management gains and losses.
(2)Includes third-party sourced volumes, construction and other activities not attributable to the production of crude oil, NGLs or natural gas.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 18 |
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Operating Results
| 2023 | 2022 | |
|---|---|---|
| Total Sales Volumes (1) (MBOE/d) | 589.5 | 585.8 |
| Total Realized Price (2) ($/BOE) | 73.02 | 91.70 |
| Crude Oil Production by Asset (Mbbls/d) | ||
| Foster Creek | 186.3 | 191.0 |
| Christina Lake | 237.4 | 246.5 |
| Sunrise (3) | 48.9 | 31.3 |
| Lloydminster Thermal | 104.1 | 99.9 |
| Lloydminster Conventional Heavy Oil | 16.7 | 16.3 |
| Total Crude Oil Production (4) (5) (Mbbls/d) | 593.4 | 586.6 |
| Natural Gas (6) (MMcf/d) | 11.9 | 12.3 |
| Total Production (MBOE/d) | 595.4 | 588.7 |
| Effective Royalty Rate (7) (percent) | ||
| Foster Creek | 25.1 | 30.5 |
| Christina Lake | 29.5 | 30.8 |
| Sunrise | 6.8 | 7.3 |
| Lloydminster (8) | 9.5 | 10.5 |
| Total Effective Royalty Rate | 21.9 | 25.2 |
| Transportation and Blending Expense (2) ($/BOE) | 8.18 | 7.89 |
| Operating Expense (2) ($/BOE) | 12.54 | 13.75 |
| Per Unit DD&A (2) ($/BOE) | 12.94 | 11.90 |
(1)Bitumen, heavy crude oil and natural gas.
(2)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
(3)On August 31, 2022, we acquired the remaining 50 percent interest in Sunrise from bp Canada.
(4)Bitumen production in 2022 included 1.6 thousand barrels per day from the Tucker asset that was sold on January 31, 2022.
(5)Oil Sands production is primarily bitumen, except for Lloydminster conventional heavy oil, which is heavy crude oil.
(6)Conventional natural gas product type.
(7)Effective royalty rates are equal to royalty expense divided by product revenue, net of transportation expenses.
(8)Composed of Lloydminster thermal and Lloydminster conventional heavy oil assets.
Revenues
Price
Our heavy oil and bitumen production must be blended with condensate to reduce its viscosity in order to transport it to market through pipelines. Within our netback calculations, our realized bitumen and heavy oil sales price excludes the impact of purchased condensate; however, it is influenced by the price of condensate. As the cost of condensate used for blending increases relative to the price of blended crude oil or our blend ratio increases, our realized heavy oil and bitumen sales price decreases.
Our realized sales price decreased to $73.02 per BOE in 2023 from $91.70 per BOE in 2022 mainly due to lower WTI benchmark prices. In 2023, WTI averaged US$77.62 per barrel (2022 – US$94.23 per barrel) and the WTI-WCS at Hardisty differential was US$18.65 per barrel (2022 – US$18.22 per barrel). In 2023, condensate benchmark pricing was at a US$17.64 per barrel premium to WCS at Hardisty, compared with US$17.77 per barrel premium in 2022.
Gross sales included $1.2 billion (2022 – $4.4 billion) from third-party sourced volumes and $377 million (2022 – $358 million) relating to construction, transportation and blending activities.
Cenovus makes storage and transportation decisions about utilizing our marketing and transportation infrastructure, including storage and pipeline assets, to optimize product mix, delivery points, transportation commitments and customer diversification. To price protect our inventories associated with storage or transport decisions, Cenovus may employ various price alignment and volatility management strategies, including risk management contracts, to reduce volatility in future cash flows and improve cash flow stability.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 19 |
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Production Volumes
Oil Sands crude oil production was 593.4 thousand barrels per day in 2023 (2022 – 586.6 thousand barrels per day).
In 2023, we sold approximately 25 percent (2022 – 20 percent) of our oil sands crude oil sales volumes to third parties at U.S. destinations and sold approximately 20 percent of our oil sands crude oil sales volumes to our Canadian and U.S. downstream operations. All remaining sales were at Canadian destinations.
Production at Foster Creek decreased 4.7 thousand barrels per day to 186.3 thousand barrels per day in 2023 compared with 2022, primarily due to a planned turnaround that commenced in mid-April and completed in early May 2023, which had a greater impact than planned maintenance and an unplanned outage in 2022. The decrease was partially offset by three new well pads that started up in 2023.
Production at Christina Lake decreased 9.1 thousand barrels per day to 237.4 thousand barrels per day in 2023 compared with 2022, primarily due to the timing of three new well pads that started up in 2023 combined with strong production in 2022 from development wells drilled in prior years. The decrease was partially offset by turnaround activity in 2022. We completed a planned turnaround in the third quarter of 2023 that had minimal production impacts.
Production at Sunrise increased 17.6 thousand barrels per day to 48.9 thousand barrels per day in 2023, compared with 2022. The Sunrise Acquisition was completed on August 31, 2022. In addition, successful results from our 2023 redevelopment program completed in the third quarter increased production year-over-year.
Production from our Lloydminster thermal assets increased 4.2 thousand barrels per day to 104.1 thousand barrels per day in 2023, compared with 2022. The increase was due to first oil at the Spruce Lake North thermal plant in August 2022, partially offset by wells taken offline for a redevelopment program and workover activity in 2023.
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.
In 2023, royalties were $3.1 billion (2022 – $4.5 billion). The Oil Sands effective royalty rate decreased to 21.9 percent in 2023 from 25.2 percent in 2022 primarily due to lower realized pricing and lower Alberta oil sands sliding scale royalty rates.
Expenses
Transportation and Blending
In 2023, blending costs decreased $1.4 billion to $8.9 billion compared with 2022 due to lower condensate prices, partially offset by higher volumes. Transportation costs rose $138 million to $1.8 billion in 2023 compared with 2022, mainly due to the Sunrise Acquisition.
Per-unit Transportation Expenses
Transportation costs increased to $8.18 per BOE in 2023 from $7.89 per BOE in 2022.
At Foster Creek, per-unit transportation costs increased slightly to $11.98 per barrel in 2023 from $11.78 per barrel in 2022, primarily due to higher storage costs, partially offset by lower fixed rail costs. In 2023, we shipped 44 percent (2022 – 43 percent) of our volumes from Foster Creek to U.S. destinations.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 20 |
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At Christina Lake, transportation costs increased slightly to $6.69 per barrel in 2023 from $6.51 per barrel in 2022. Increased tariff rates and a higher percentage of our volumes shipped to U.S. destinations were partially offset by lower fixed rail costs. In 2023, we shipped 18 percent (2022 – 13 percent) of our volumes from Christina Lake to U.S. destinations.
At Sunrise, transportation costs increased slightly to $12.47 per barrel in 2023 from $12.26 per barrel in 2022, mainly due to higher tariff rates. In 2023, we shipped 50 percent (2022 – 51 percent) of our volumes from Sunrise to U.S. destinations.
At our other Oil Sands assets, transportation costs in 2023, were $3.51 per barrel (2022 – $3.49 per barrel).
Operating
Primary drivers of our operating expenses in 2023 were fuel, workforce, repairs and maintenance, and chemicals. Total operating expenses decreased $214 million to $2.7 billion in 2023 compared with 2022, mainly driven by lower fuel costs as a result of significant declines in AECO benchmark prices. The decreases were offset by higher repairs and maintenance costs in 2023, compared with 2022. We have experienced some inflationary pressures on our costs, however, we manage our costs by securing long-term contracts, working with vendors and purchasing long-lead items to mitigate future cost escalations.
Unit Operating Expenses (1)
| ($/BOE) | 2023 | Percent <br>Change | 2022 |
|---|---|---|---|
| Foster Creek | |||
| Fuel | 3.48 | (43) | 6.07 |
| Non-Fuel | 7.96 | 22 | 6.52 |
| Total | 11.44 | (9) | 12.59 |
| Christina Lake | |||
| Fuel | 2.98 | (41) | 5.07 |
| Non-Fuel | 5.54 | 14 | 4.87 |
| Total | 8.52 | (14) | 9.94 |
| Sunrise | |||
| Fuel | 4.78 | (32) | 7.01 |
| Non-Fuel | 12.24 | 17 | 10.48 |
| Total | 17.02 | (3) | 17.49 |
| Other Oil Sands (2) | |||
| Fuel | 4.54 | (38) | 7.35 |
| Non-Fuel | 15.78 | 5 | 15.10 |
| Total | 20.32 | (9) | 22.45 |
| Total Oil Sands | |||
| Fuel | 3.60 | (39) | 5.95 |
| Non-Fuel | 8.94 | 15 | 7.80 |
| Total | 12.54 | (9) | 13.75 |
(1)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
(2)Includes Tucker, Lloydminster thermal and Lloydminster conventional heavy oil assets. The Tucker asset was sold on January 31, 2022.
Per-unit non-fuel costs increased in 2023 compared with 2022 at all of our Oil Sands assets, primarily due to:
•Lower sales volumes and planned turnarounds at Foster Creek and Christina Lake, partially offset by a planned turnaround, maintenance activity and an unplanned outage in 2022.
•Higher repairs and maintenance costs at Sunrise, partially offset by higher gross sales volumes in 2023.
•A rise in repairs and maintenance and workover activity in our other Oil Sands assets.
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Netbacks (1)
| (/BOE) | 2023 | 2022 |
| Sales Price | 73.02 | 91.70 |
| Royalties | 14.20 | 20.96 |
| Transportation and Blending | 8.18 | 7.89 |
| Operating Expenses | 12.54 | 13.75 |
| Netback | 38.10 | 49.10 |
All values are in US Dollars.
(1)The components of netbacks are specified financial measures. Netbacks contain a Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
Realized (Gain) Loss on Risk Management
In 2023, our realized risk management losses were $17 million (2022 – $1.5 billion). The decrease from 2022 is due to management’s decision to liquidate our WTI positions related to crude oil sales price risk management in the second quarter of 2022.
Conventional
In 2023, we:
•Delivered safe operations.
•Produced 119.9 thousand BOE per day (2022 – 127.2 thousand BOE per day).
•Responded to wildfires in northern Alberta. In early May, we temporarily shut-in approximately 85 thousand BOE per day of production in the operating areas of Rainbow Lake, Elmworth-Wapiti, Kaybob-Edson and Clearwater to ensure the safety of our staff, local communities and assets. The majority of our wells and facilities impacted by the fire were restarted by June. Additional wildfire activity impacted our Rainbow Lake property in September and into the fourth quarter, and had minor impacts on production. We returned to full operations in the fourth quarter.
•Generated Operating Margin of $583 million, a decrease from $1.2 billion in 2022 primarily due to lower average realized sales prices.
•Invested capital of $452 million with continued focus on drilling, completion, tie-in and infrastructure projects.
•Averaged a Netback of $12.02 per BOE (2022 – $27.43 per BOE).
Financial Results
| ($ millions) | 2023 | 2022 |
|---|---|---|
| Revenues | ||
| Gross Sales (1) | 3,273 | 4,439 |
| Less: Royalties | 112 | 298 |
| 3,161 | 4,141 | |
| Expenses | ||
| Purchased Product | 1,695 | 2,023 |
| Transportation and Blending (1) | 298 | 250 |
| Operating | 590 | 541 |
| Realized (Gain) Loss on Risk Management | (5) | 92 |
| Operating Margin | 583 | 1,235 |
| Unrealized (Gain) Loss on Risk Management | (19) | 13 |
| Depreciation, Depletion and Amortization | 386 | 370 |
| Exploration Expense | 6 | 1 |
| Segment Income (Loss) | 210 | 851 |
(1)Comparative periods reflect certain revisions. See Note 39 of the Consolidated Financial Statements and Prior Period Revisions found in the Advisory section of this MD&A for further details.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 22 |
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Operating Margin Variance
Year Ended December 31, 2023
(1)Changes to price include the impact of realized risk management gains and losses.
(2)Reflects Operating Margin from processing facilities.
Operating Results
| 2023 | 2022 | |
|---|---|---|
| Total Sales Volumes (MBOE/d) | 119.9 | 127.2 |
| Total Realized Price (1) ($/BOE) | 31.76 | 48.15 |
| Light Crude Oil ($/bbl) | 101.34 | 118.64 |
| NGLs ($/bbl) | 48.25 | 63.22 |
| Conventional Natural Gas ($/Mcf) | 3.91 | 6.50 |
| Production by Product | ||
| Light Crude Oil (Mbbls/d) | 5.9 | 7.5 |
| NGLs (Mbbls/d) | 21.7 | 23.8 |
| Conventional Natural Gas (MMcf/d) | 554.1 | 576.1 |
| Total Production (MBOE/d) | 119.9 | 127.2 |
| Conventional Natural Gas Production (percentage of total) | 77 | 75 |
| Crude Oil and NGLs Production (percentage of total) | 23 | 25 |
| Effective Royalty Rate (percent) | 10.8 | 15.4 |
| Transportation Expense (1) ($/BOE) | 4.16 | 3.16 |
| Operating Expense (1) ($/BOE) | 13.02 | 11.18 |
| Per Unit DD&A (1) ($/BOE) | 8.76 | 8.23 |
(1)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
Revenues
Price
Our total realized sales price decreased in 2023, compared with 2022, primarily due to lower crude oil and natural gas benchmark prices.
In 2023, gross sales included $1.7 billion (2022 – $2.0 billion) relating to third-party sourced volumes; and amounts relating to processing activities undertaken for third parties of $188 million (2022 – $178 million).
Production Volumes
Production volumes decreased 7.3 thousand BOE per day in 2023 to 119.9 thousand BOE per day in 2023 compared with 2022. The year-over-year decrease was primarily due to the impact of the wildfires in the second quarter of 2023, partially offset by successful results from our 2023 development program.
Royalties
The Conventional assets are subject to royalty regimes in Alberta and British Columbia. Royalties decreased to $112 million in 2023 from $298 million in 2022 and effective royalty rates declined, primarily due to sharp declines in natural gas pricing.
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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 $48 million to $298 million in 2023 compared with 2022, and per-unit transportation costs increased to $4.16 per BOE in 2023 from $3.16 per BOE in 2022. The increases were mainly due to higher tariff rates and additional storage costs, combined with lower sales volumes.
Operating
Primary drivers of operating expenses in 2023 were repairs and maintenance, workforce, property taxes and lease costs, and electricity. Total operating expenses increased $49 million to $590 million in 2023 compared with 2022, due to the higher repairs and maintenance costs. The wildfires had minimal impact on total operating expenses. Operating expenses per BOE increased $1.84 per BOE to $13.02 per BOE in 2023 compared with 2022, due to the same factors impacting total operating costs and lower sales volumes as a result of wildfire activity.
Netbacks (1)
| ($/BOE) | 2023 | 2022 |
|---|---|---|
| Sales Price | 31.76 | 48.15 |
| Royalties | 2.56 | 6.38 |
| Transportation and Blending | 4.16 | 3.16 |
| Operating Expenses | 13.02 | 11.18 |
| Netback | 12.02 | 27.43 |
(1)The components of netbacks are specified financial measures. Netbacks contain a Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
Offshore
In 2023, we:
•Delivered safe operations.
•Resumed production at the Terra Nova FPSO in late November. Our share of production in December was 4.1 thousand barrels per day.
•Achieved first gas production from the MAC field in Indonesia in September.
•Produced 63.4 thousand BOE per day of light crude oil, NGLs and natural gas (2022 – 70.3 thousand BOE per day).
•Generated Operating Margin of $1.1 billion, a decrease of $492 million compared with 2022, mainly due to lower sales volumes from our Atlantic and China operations, and decreased realized light crude oil sales prices.
•Earned a Netback of $56.48 per BOE (2022 – $68.90 per BOE).
•Invested capital of $642 million mainly for the West White Rose project and Terra Nova ALE project in the Atlantic region.
The West White Rose project was approximately 75 percent complete as at December 31, 2023. Since our decision in 2022 to restart the project, we have invested approximately $578 million. We reached a major milestone on the project in the second quarter with the completion of the conical slip form operation for the concrete gravity structure. First oil is expected in 2026.
In late December 2023, we suspended production at the White Rose field as we prepared for the planned SeaRose ALE project. The SeaRose FPSO departed the field for its scheduled dry docking in late January 2024. We expect to resume production at the White Rose field late in the third quarter of 2024.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 24 |
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Financial Results
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| ($ millions) | Atlantic | Asia Pacific | Offshore | Atlantic | Asia Pacific | Offshore |
| Revenues | ||||||
| Gross Sales | 400 | 1,217 | 1,617 | 578 | 1,442 | 2,020 |
| Less: Royalties | 15 | 84 | 99 | (3) | 80 | 77 |
| 385 | 1,133 | 1,518 | 581 | 1,362 | 1,943 | |
| Expenses | ||||||
| Transportation and Blending | 16 | — | 16 | 15 | — | 15 |
| Operating | 262 | 122 | 384 | 204 | 114 | 318 |
| Operating Margin (1) | 107 | 1,011 | 1,118 | 362 | 1,248 | 1,610 |
| Depreciation, Depletion and Amortization | 487 | 585 | ||||
| Exploration Expense | 17 | 91 | ||||
| (Income) Loss from Equity-Accounted Affiliates | (57) | (23) | ||||
| Segment Income (Loss) | 671 | 957 |
(1)Atlantic and Asia Pacific Operating Margin are non-GAAP financial measures. See the Specified Financial Measures Advisory of this MD&A.
Operating Margin Variance
Year Ended December 31, 2023
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 25 |
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Operating Results
| 2023 | 2022 | |
|---|---|---|
| Sales Volumes | ||
| Atlantic (Mbbls/d) | 9.6 | 11.3 |
| Asia Pacific (MBOE/d) | ||
| China | 40.5 | 48.2 |
| Indonesia (1) | 14.7 | 10.5 |
| Total Asia Pacific | 55.2 | 58.7 |
| Total Sales Volumes (MBOE/d) | 64.8 | 70.0 |
| Total Realized Price (2) ($/BOE) | 81.63 | 89.72 |
| Atlantic - Light Crude Oil ($/bbl) | 113.74 | 140.65 |
| Asia Pacific (1) ($/BOE) | 76.04 | 79.96 |
| NGLs ($/bbl) | 99.73 | 110.05 |
| Conventional Natural Gas ($/Mcf) | 11.71 | 11.98 |
| Production by Product | ||
| Atlantic - Light Crude Oil (Mbbls/d) | 8.2 | 11.6 |
| Asia Pacific (1) | ||
| NGLs (Mbbls/d) | 10.8 | 12.4 |
| Conventional Natural Gas (MMcf/d) | 266.6 | 277.7 |
| Total Asia Pacific (MBOE/d) | 55.2 | 58.7 |
| Total Production (MBOE/d) | 63.4 | 70.3 |
| Effective Royalty Rate (percent) | ||
| Atlantic | 3.7 | (0.5) |
| Asia Pacific (1) | 10.3 | 11.5 |
| Operating Expense (2) ($/BOE) | 17.20 | 12.64 |
| Atlantic | 67.93 | 42.03 |
| Asia Pacific (1) | 8.37 | 7.00 |
| Per Unit DD&A (2) ($/BOE) | 25.57 | 30.76 |
(1)Reported sales volumes, associated per-unit values and royalty rates reflect Cenovus’s 40 percent interest in HCML. 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 decreased in 2023 compared with 2022, primarily due to lower Brent benchmark pricing.
Production Volumes
Atlantic production decreased 3.4 thousand barrels per day to 8.2 thousand barrels per day in 2023 compared with 2022. The decrease was due to turnaround work on the SeaRose FPSO completed in March and April of 2023 having a larger impact than annual planned maintenance completed in the third quarter in 2022. In addition, the decrease in Cenovus’s working interest at the White Rose field and satellite extensions effective May 31, 2022, lowered production year-over-year. Light crude oil production from the White Rose fields is offloaded from the SeaRose FPSO to tankers and stored at an onshore terminal before shipment to buyers, which results in a timing difference between production and sales.
Asia Pacific production decreased 3.5 thousand barrels per day to 55.2 thousand barrels per day in 2023 compared with 2022. The decrease was mainly due to a temporary unplanned outage in the second quarter in China, related to the disconnection of the umbilical by a third-party vessel in early April and reconnected in May. Changes to gas sales agreements at Liwan 3-1 and Liuhua 29-1 in the second quarter of 2022 also resulted in a net decrease in production. The decrease was partially offset by first gas production at the MBH and MDA fields in Indonesia in the fourth quarter of 2022, first gas production at the MAC field in Indonesia in September 2023, and planned maintenance in China in the second and third quarters of 2022 having a larger impact than planned maintenance in June 2023.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 26 |
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Royalties
For the year ended December 31, 2023, Atlantic royalties were $15 million (2022 – recoveries of $3 million). Royalties increased in 2023, as 2022 royalties at the White Rose field included adjustments based on an amended agreement between our working interest partners and the Government of Newfoundland and Labrador.
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 rate for the year ended December 31, 2023, declined to 10.3 percent (2022 – 11.5 percent), as a result of the MBH, MDA and MAC fields coming online in 2022 and 2023, having lower rates on initial start-up. The decrease was partially offset by a consumption tax implemented in China in June 2023 impacting royalties on NGLs.
Expenses
Operating
Primary drivers of our Atlantic operating expenses in 2023 were repairs and maintenance, vessel and helicopter costs, and workforce. Operating expenses increased $58 million to $262 million in 2023 compared with 2022. The increase was due to costs associated with preparation and maintenance activities for the Terra Nova FPSO restart, and preparation costs for the SeaRose ALE project. We incurred costs in 2023 and 2022 on the ramp-up of the West White Rose project leading up to the start of major construction in late March 2023. Per-unit operating expenses increased in 2023 compared with 2022 due to lower sales volumes combined with the same factors that impacted total operating expenses.
Primary drivers of our China operating expenses in 2023 were repairs and maintenance, insurance and workforce. Total operating expenses in China increased $8 million to $122 million in 2023, compared with 2022, due to costs related to the umbilical repair. Per-unit operating expenses associated with our assets in China increased compared with 2022 mainly due to lower sales volumes and the same factors that impacted total operating expenses. Per-unit operating expenses associated with our Indonesian assets decreased compared with 2022 mainly due to higher sales volumes.
Transportation
Transportation costs in the Atlantic region were $16 million in 2023 (2022 – $15 million), and includes the cost of transporting crude oil from the SeaRose FPSO unit to onshore via tankers, as well as storage costs.
Netbacks (1)
| 2023 | ||||||
|---|---|---|---|---|---|---|
| ($/BOE, except where indicated) | Atlantic (/bbl) | China | Indonesia (2) | Total Offshore | ||
| Sales Price | 82.14 | 59.16 | 81.63 | |||
| Royalties | 5.68 | 13.75 | 7.29 | |||
| Transportation and Blending | — | — | 0.66 | |||
| Operating Expenses | 7.51 | 10.76 | 17.20 | |||
| Netback | 68.95 | 34.65 | 56.48 |
All values are in US Dollars.
| 2022 | ||||||
|---|---|---|---|---|---|---|
| ($/BOE, except where indicated) | Atlantic (/bbl) | China | Indonesia (2) | Total Offshore | ||
| Sales Price | 81.99 | 70.66 | 89.72 | |||
| Royalties | 4.57 | 30.19 | 7.57 | |||
| Transportation and Blending | — | — | 0.61 | |||
| Operating Expenses | 5.62 | 13.32 | 12.64 | |||
| Netback | 71.80 | 27.15 | 68.90 |
All values are in US Dollars.
(1)The components of netbacks are specified financial measures. Netbacks contain a Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
(2)Reported sales volumes, associated per-unit values and royalty rates reflect Cenovus’s 40 percent interest in HCML. Revenues and expenses related to the HCML joint venture are accounted for using the equity method in the consolidated financial statements.
Exploration Expense
We recorded exploration expense of $17 million in 2023 (2022 – $91 million). Exploration expense in 2022 was 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. – 2023 Management's Discussion and Analysis | 27 |
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DOWNSTREAM
Canadian Refining
In 2023, we:
•Delivered safe and reliable operations.
•Increased throughput to 100.7 thousand barrels per day (2022 – 92.9 thousand barrels per day), and achieved crude utilization of 90 percent and 95 percent at the Upgrader and Lloydminster Refinery, respectively (2022 – 84 percent and 83 percent, respectively).
•Generated Operating Margin of $675 million, a decrease of $24 million compared with 2022.
Financial Results
| ($ millions) | 2023 | 2022 |
|---|---|---|
| Revenues | 6,233 | 7,792 |
| Purchased Product | 4,919 | 6,389 |
| Gross Margin (1) | 1,314 | 1,403 |
| Expenses | ||
| Operating | 639 | 704 |
| Operating Margin | 675 | 699 |
| Depreciation, Depletion and Amortization | 185 | 208 |
| Segment Income (Loss) | 490 | 491 |
(1)Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
Select Operating Results
| 2023 | 2022 | |
|---|---|---|
| Total Canadian Refining | ||
| Heavy Crude Oil Unit Throughput Capacity (1) (Mbbls/d) | 110.5 | 110.5 |
| Heavy Crude Oil Unit Throughput (Mbbls/d) | 100.7 | 92.9 |
| Crude Utilization (percent) | 91 | 84 |
| Total Production (2) (Mbbls/d) | 114.2 | 105.2 |
| Synthetic Crude Oil | 47.6 | 46.0 |
| Asphalt | 15.4 | 13.5 |
| Diesel | 12.9 | 9.3 |
| Other | 33.3 | 31.5 |
| Ethanol | 5.0 | 4.9 |
| Refining Margin (3) ($/bbl) | 32.04 | 33.92 |
| Unit Operating Expense (4) ($/bbl) | 12.68 | 13.91 |
(1)Based on crude oil name plate capacity.
(2)Includes volumes from the Upgrader, Lloydminster Refinery and the ethanol plants.
(3)Contains a non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A. Revenues from the Upgrader and commercial fuels business for the year ended December 31, 2023, was $4.8 billion (2022 – $3.8 billion, from the Upgrader). Revenue from the Lloydminster Refinery for the year ended December 31, 2023 was $1.0 billion (2022 – $1.1 billion).
(4)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 28 | |
|---|---|---|
| 2023 | 2022 | |
| --- | --- | --- |
| Lloydminster Upgrader | ||
| Heavy Crude Oil Unit Throughput Capacity (1) (Mbbls/d) | 81.5 | 81.5 |
| Heavy Crude Oil Unit Throughput (Mbbls/d) | 73.1 | 68.7 |
| Crude Utilization (percent) | 90 | 84 |
| Production (Mbbls/d) | 81.5 | 76.0 |
| Refining Margin (2) ($/bbl) | 34.48 | 36.04 |
| Unit Operating Expense (3) ($/bbl) | 12.32 | 12.65 |
| Upgrading Differential (4) ($/bbl) | 31.14 | 32.84 |
| Lloydminster Refinery | ||
| Heavy Crude Oil Unit Throughput Capacity (1) (Mbbls/d) | 29.0 | 29.0 |
| Heavy Crude Oil Unit Throughput (Mbbls/d) | 27.6 | 24.2 |
| Crude Utilization (percent) | 95 | 83 |
| Production (Mbbls/d) | 27.7 | 24.3 |
| Refining Margin (2) ($/bbl) | 25.58 | 27.91 |
| Unit Operating Expense (3) ($/bbl) | 13.62 | 17.49 |
(1)Based on crude oil name plate capacity.
(2)Contains a non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A. Revenues from the Upgrader and commercial fuels business for the year ended December 31, 2023, was $4.8 billion (2022 – $3.8 billion, from the Upgrader). Revenue from the Lloydminster Refinery for the year ended December 31, 2023 was $1.0 billion (2022 – $1.1 billion).
(3)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
(4)Based on benchmark price differential between heavy oil feedstock and synthetic crude.
In 2023, Canadian Refining throughput increased 7.8 thousand barrels per day from 2022 to 100.7 thousand barrels per day, and total production increased 9.0 thousand barrels per day to 114.2 thousand barrels per day due to:
•Increased throughput at the Upgrader, which rose 4.4 thousand barrels per day to 73.1 thousand barrels per day, primarily due to a planned turnaround and unplanned operational outages in 2022. The increase was partially offset by temporary unplanned outages in the second and fourth quarters of 2023. Throughput was also impacted by cold weather in the fourth quarter of 2022 until the middle of January 2023.
•Increased throughput at the Lloydminster Refinery, primarily due to the refinery’s high utilization in 2023, combined with a planned turnaround in the second quarter of 2022 and an unplanned outage in the third quarter of 2022. Throughput rose 3.4 thousand barrels per day to 27.6 thousand barrels per day compared with 2022.
Revenues and Gross Margin
The Upgrader processes blended heavy crude oil and bitumen into high value synthetic crude oil and low sulphur diesel. 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.
The Lloydminster Refinery processes blended heavy crude oil into asphalt and industrial products. Gross margin is largely dependent on asphalt and industrial products pricing and the cost of heavy crude oil feedstock. Sales from the Lloydminster Refinery are seasonal and increase during paving season, which typically runs from May through October each year.
The Upgrader and Lloydminster Refinery source crude oil feedstock from our Oil Sands segment. In 2023, approximately 13 percent of total crude oil sales volumes from our Lloydminster thermal and Lloydminster conventional heavy oil assets were sold to our Canadian Refining segment.
In 2023, revenues decreased by $1.6 billion to $6.2 billion due to lower synthetic crude and refined product pricing, combined with the disposition of our retail fuels network in the third quarter of 2022. The decrease was partially offset by higher production volumes from the Upgrader and Lloydminster Refinery. Synthetic crude oil benchmark prices decreased 19 percent to US$79.61 per barrel compared with 2022.
Gross margin decreased $89 million to $1.3 billion in 2023 compared with 2022, primarily driven by the disposition of our retail fuels network in the third quarter of 2022 and the factors discussed above. We increased diesel production relative to synthetic crude in 2023 as we continually optimize production to capture higher margins.
See the Specified Financial Measures Advisory of this MD&A for revenues and gross margin by asset.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 29 |
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Operating Expenses
Primary drivers of operating expenses in 2023 were repairs and maintenance, workforce and energy costs.
Total operating costs decreased $65 million to $639 million in 2023 compared with 2022, mainly due to the disposition of our retail fuels network in the third quarter of 2022, lower energy costs and planned turnarounds at the Upgrader and Lloydminster Refinery in the second quarter of 2022. The decrease was partially offset by higher repairs and maintenance spend at the Upgrader in 2023. Per-unit operating costs decreased $1.23 per barrel to $12.68 per barrel in 2023, primarily due to higher throughput and lower energy costs. Per-unit operating expenses only include operating costs and throughput at the Upgrader and Lloydminster Refinery.
U.S. Refining
In 2023, we increased our crude throughput capacity by 129.0 thousand barrels per day through the acquisition of the remaining 50 percent of the Toledo Refinery and the restart of the Superior Refinery, providing further integration of our heavy oil production and refining capabilities.
In addition, we:
•Delivered safe operations and averaged crude utilization of 75 percent (2022 – 80 percent).
•Generated operating margin of $477 million, $1.3 billion lower than 2022 driven by lower market crack spreads and refined product pricing. Refining benchmarks weakened significantly in the fourth quarter of 2023.
•Closed the Toledo Acquisition on February 28, 2023. The acquisition provided us with full ownership and operatorship of the Toledo Refinery and gave us an additional 80.0 thousand barrels per day of throughput capacity.
•Safely restarted, and subsequently returned, the Toledo Refinery to full operations in June. The refinery had a strong second half of the year, demonstrated by crude utilization of 88 percent during that period. Total crude utilization in 2023 was 57 percent (2022 – 45 percent).
•Introduced crude oil at the Superior Refinery in mid-March and restarted the FCCU in early October. Crude utilization for the last two months of 2023, following the restart of the FCCU, was 66 percent.
•Safely completed planned turnarounds at the Wood River Refinery in the spring and at the Borger Refinery in the spring and fall.
•Achieved utilization of 85 percent (2022 – 90 percent) at the Lima Refinery, which was impacted by planned maintenance and unplanned outages in the fourth quarter.
•Invested capital of $602 million, primarily focused on the Superior Refinery rebuild, refining reliability projects and growth spend at the Wood River and Borger refineries, and sustaining activities at the Lima and Toledo refineries.
Financial Results
| ($ millions) | 2023 | 2022 |
|---|---|---|
| Revenues (1) | 26,393 | 30,218 |
| Purchased Product (1) | 23,354 | 26,020 |
| Gross Margin (2) | 3,039 | 4,198 |
| Expenses | ||
| Operating | 2,562 | 2,346 |
| Realized (Gain) Loss on Risk Management | — | 112 |
| Operating Margin | 477 | 1,740 |
| Unrealized (Gain) Loss on Risk Management | (17) | 18 |
| Depreciation, Depletion and Amortization | 486 | 640 |
| Segment Income (Loss) | 8 | 1,082 |
(1)Comparative periods reflect certain revisions. See Note 39 of the Consolidated Financial Statements and Prior Period Revisions found in the Advisory section of this MD&A for further details.
(2)Non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 30 |
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Select Operating Results - Consolidated
| 2023 | 2022 | |
|---|---|---|
| Total U.S. Refining | ||
| Crude Oil Unit Throughput Capacity (1) (2) (Mbbls/d) | 635.2 | 551.5 |
| Crude Oil Unit Throughput (2) (Mbbls/d) | 459.7 | 400.8 |
| Heavy Crude Oil | 173.9 | 116.1 |
| Light and Medium Crude Oil | 285.8 | 284.7 |
| Crude Utilization (2) (percent) | 75 | 80 |
| Total Refined Product Production (Mbbls/d) | 485.0 | 419.9 |
| Gasoline | 231.2 | 199.8 |
| Distillates (3) | 167.0 | 153.4 |
| Asphalt | 19.8 | 8.9 |
| Other | 67.0 | 57.8 |
| Refining Margin (4) ($/bbl) | 18.12 | 28.70 |
| Unit Operating Expense (5) ($/bbl) | 15.27 | 16.04 |
(1)Based on crude oil name plate capacity.
(2)The Superior Refinery’s crude oil unit throughput and crude oil unit throughput capacity are included in the crude utilization calculation effective April 1, 2023. The Toledo Refinery’s crude utilization includes a weighted average crude oil capacity with full ownership acquired on February 28, 2023.
(3)Includes diesel and jet fuel.
(4)Contains a non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
(5)Specified financial measure. See the Specified Financial Measures Advisory of this MD&A.
Select Operating Results - by Refinery
| 2023 | 2022 | |||||||
|---|---|---|---|---|---|---|---|---|
| Lima | Toledo | Superior | Wood River and Borger (1) | Lima | Toledo | Superior | Wood River and Borger (1) | |
| Crude Oil Unit Throughput Capacity (2) (Mbbls/d) | 178.7 | 160.0 | 49.0 | 247.5 | 175.0 | 80.0 | 49.0 | 247.5 |
| Crude Oil Unit Throughput (Mbbls/d) | 152.7 | 83.1 | 22.6 | 201.3 | 157.9 | 36.3 | — | 206.6 |
| Crude Utilization (3) (percent) | 85 | 57 | 61 | 81 | 90 | 45 | — | 83 |
(1)Represents Cenovus’s 50 percent interest in the non-operated Wood River and Borger refinery operations.
(2)Based on crude oil name plate capacity.
(3)The Superior Refinery’s crude oil unit throughput and crude oil unit throughput capacity are included in the crude utilization calculation effective April 1, 2023. The Toledo Refinery’s crude utilization includes a weighted average crude oil capacity with full ownership acquired on February 28, 2023.
U.S. Refining throughput increased 58.9 thousand barrels per day from 2022 to 459.7 thousand barrels per day, and total refined product production increased 65.1 thousand barrels per day to 485.0 thousand barrels per day, primarily related to the Toledo Acquisition and the restart of the Toledo and Superior refineries. Other factors that impacted throughput and production include:
•Less downtime at the Wood River Refinery, primarily due to the two planned turnarounds in 2022 having a larger impact than the planned turnaround in the spring of 2023, combined with the decision to reduce rates to optimize margins as market conditions dictated in the first quarter of 2022.
•Two planned turnarounds and unplanned outages at the Borger Refinery, which had a larger impact than unplanned outages and the turnaround completed in 2022. The refinery experienced an unplanned operational outage following the fall turnaround which resulted in a slower than expected restart. Combined throughput at the Wood River and Borger refineries decreased 5.3 thousand barrels per day to 201.3 thousand barrels per day in 2023.
•Unplanned outages combined with planned maintenance at the Lima Refinery in the second half of 2023.
•Late in the year, we flexed throughput at our U.S. refineries to optimize our margins.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 31 |
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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. The Chicago 3-2-1 market crack spread reflects the market for the Toledo, Lima and Wood River refineries. The Group 3 3-2-1 market crack spread reflects the market for the Superior and Borger refineries. 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, distillates 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.
In 2023, the Chicago 3-2-1 crack spread decreased 29 percent to US$24.19 per barrel compared with 2022 and the Group 3 crack spread declined 11 percent to US$29.66 per barrel. Because of the relative strength of the Group 3 crack spread, our Borger and Superior refineries were not impacted as heavily by pricing declines as our other refineries. Average benchmark gasoline prices fell 19 percent to US$97.86 per barrel in 2023 compared with 2022. Average benchmark diesel prices also fell US$34.15 per barrel to US$109.70 per barrel in the year compared with 2022.
Revenues decreased $3.8 billion in 2023 compared with 2022, primarily due to lower refined product pricing, partially offset by higher production. Gross margin decreased $1.2 billion in 2023 compared with 2022, primarily due to lower market crack spreads discussed above, impacts from processing feedstock purchased at higher prices in prior periods, partially offset by higher production and weaker RINs pricing (US$7.04 per barrel in 2023 compared with US$7.72 per barrel in 2022).
Operating Expenses
Primary drivers of operating expenses in 2023 were repairs and maintenance, and workforce.
Operating expenses increased $216 million to $2.6 billion in 2023, compared with 2022, primarily due to the restart of operations at the Toledo and Superior refineries combined with full ownership of the Toledo Refinery. The increases were also due to:
•Increased repairs and maintenance spend at the Lima Refinery, primarily due to higher engineering services and inspection costs, combined with turnaround preparation costs related to the turnaround that was deferred from 2023 to 2024.
•Increased per barrel repairs and maintenance spend at the Borger Refinery, primarily related to the two planned turnarounds that were completed in 2023.
•Increased workforce costs at the Superior Refinery for restart and ramp up activities and higher overall workforce costs related to the Toledo Acquisition.
•Higher electricity pricing, primarily impacting the Lima Refinery, partially offset by lower electricity pricing at the Wood River Refinery.
•Inflationary pressures on maintenance and chemical costs.
The increase was partially offset by lower turnaround costs on a per barrel basis at the Toledo Refinery due to the significant planned turnaround completed in 2022, as well as lower per barrel repairs and maintenance costs at the Wood River Refinery due to the planned turnarounds in 2022. Fuel costs also decreased at the Wood River, Lima and Borger refineries due to the decline in natural gas benchmark pricing.
In 2023, per-unit operating expenses decreased $0.77 per barrel to $15.27 per barrel, compared with 2022, primarily due to higher throughput, partially offset by the increase in operating expenses discussed above.
(Gain) Loss on Risk Management
In 2023, we incurred no realized risk management gains or losses, compared with losses of $112 million in 2022, due to the settlement of benchmark prices relative to our risk management contract prices. In 2023, we recorded unrealized risk management gains of $17 million (2022 – losses of $18 million), on our crude oil and refined products financial instruments primarily due to changes to forward benchmark pricing relative to our risk management contract prices that related to future periods.
DD&A
U.S. Refining DD&A in 2023 was $486 million, compared with $640 million in 2022. The decrease was primarily due to net impairment charges of $266 million recorded in the fourth quarter of 2022.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 32 |
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CORPORATE AND ELIMINATIONS
Financial Results
| ($ millions) | 2023 | 2022 |
|---|---|---|
| Realized (Gain) Loss on Risk Management | (3) | 31 |
| Unrealized (Gain) Loss on Risk Management | 73 | (89) |
| General and Administrative | 688 | 865 |
| Finance Costs | 671 | 820 |
| Interest Income | (133) | (81) |
| Integration, Transaction and Other Costs | 85 | 106 |
| Foreign Exchange (Gain) Loss, Net | (67) | 343 |
| Revaluation (Gain) Loss | 34 | (549) |
| Re-measurement of Contingent Payments | 59 | 162 |
| (Gain) Loss on Divestiture of Assets | (14) | (269) |
| Other (Income) Loss, Net | (63) | (532) |
Risk Management
In 2023, our corporate risk management activities resulted in realized risk management gains related to foreign exchange risk management contracts. Unrealized risk management losses were primarily related to renewable power contracts.
General and Administrative
Primary drivers of our general and administrative expenses in 2023 were workforce costs, information technology costs and employee long-term incentive costs. General and administrative expenses decreased in 2023 compared with 2022, primarily due to lower stock-based compensation costs of $97 million (2022 – $373 million). The decrease is partially offset by higher spending on community investment initiatives, workforce and information technology costs.
Finance Costs
Finance costs were lower in 2023 compared with 2022 as a result of the Company’s lower long-term debt. In the third quarter of 2023, we purchased long-term debt with an aggregate principal amount of US$1.0 billion at a discount of $84 million. In the third quarter of 2022, we purchased long-term debt with an aggregate principal amount of US$2.2 billion at a discount of $4 million. Refer to the Liquidity and Capital Resources section of this MD&A for further details on long-term debt.
The annualized weighted average interest rate on outstanding debt for 2023 was 4.7 percent (2022 – 4.7 percent).
Integration, Transaction and Other Costs
We incurred integration and transaction costs of $57 million related to the Toledo Acquisition. We also incurred costs of $28 million related to modernizing and replacing certain information technology systems, optimizing business processes and standardizing data across the Company. In 2022, we incurred integration and transaction costs of $106 million, primarily related to the integration of Cenovus and Husky.
Foreign Exchange (Gain) Loss, Net
| ($ millions) | 2023 | 2022 |
|---|---|---|
| Unrealized Foreign Exchange (Gain) Loss | (210) | 365 |
| Realized Foreign Exchange (Gain) Loss | 143 | (22) |
| (67) | 343 |
In 2023, unrealized foreign exchange gains, compared with losses in 2022, were mainly related to the translation of U.S. denominated debt caused by a stronger Canadian dollar at December 31, 2023. Realized foreign exchange losses in 2023 were primarily due to the settlement of fixed-term debt. Realized foreign exchange gains in 2022 were primarily related to working capital, partially offset by a lower realized foreign exchange loss on the settlement of fixed-term debt in 2023 compared with 2022.
Revaluation (Gain) Loss
As required by IFRS 3, “Business Combinations”, 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 5 of the Consolidated Financial Statements for further details. Cenovus recognized a revaluation loss of $34 million in 2023 as part of the Toledo Acquisition. In the third quarter of 2022, Cenovus recognized a revaluation gain of $549 million as part of the Sunrise Acquisition.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 33 |
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Re-measurement of Contingent Payments
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 in a quarter exceeds $52.00 per barrel. The maximum cumulative variable payment is $600 million. Refer to Note 26 of the Consolidated Financial Statements for further details.
The variable payment is accounted for as a financial option with changes in fair value recognized in net earnings (loss). As at December 31, 2023, the fair value of the variable payment was estimated to be $164 million, resulting in non-cash re-measurement losses of $59 million in the year ended December 31, 2023 (2022 – gains of $89 million).
For the year ended December 31, 2023, we paid $299 million under this agreement (2022 – $nil). The payment of $107 million for the quarter ended November 30, 2023, was made on January 29, 2024. The payments are recognized in cash from (used in) investing activities. As of December 31, 2023, average estimated WCS forward pricing for the remaining term of the variable payment is approximately $71.86 per barrel. As at December 31, 2023, the remaining payments are considered current liabilities. The maximum payment over the remaining term of the contract is $194 million.
The contingent payment associated with the transaction with ConocoPhillips related to its 50 percent interest in the FCCL Partnership ended on May 17, 2022, and the final payment was made in July 2022. We recorded a non-cash remeasurement loss of $251 million associated with this payment in 2022.
(Gain) Loss on Divestiture of Assets
We had no material divestitures in 2023. In 2022, we recognized a gain on divestiture of assets of $269 million due to the sale of our Tucker and Wembley assets, the divestiture of 12.5 percent of our interest in the White Rose field and satellite extensions, and the retail divestiture.
Other (Income) Loss, Net
In 2023, other income was $63 million (2022 – $532 million). Other income in 2022 was primarily due to insurance proceeds related to the 2018 incidents at the Superior Refinery and in the Atlantic region, combined with funding received under the Government of Alberta’s Site Rehabilitation Program.
DD&A
The largest drivers of corporate depreciation include information technology assets, right-of-use buildings and leasehold improvements. DD&A for the year ended December 31, 2023, was $107 million, compared with $113 million in 2022.
Income Taxes
| ($ millions) | 2023 | 2022 |
|---|---|---|
| Current Tax | ||
| Canada | 1,041 | 1,252 |
| United States | (109) | 104 |
| Asia Pacific | 224 | 262 |
| Other International | 25 | 21 |
| Total Current Tax Expense (Recovery) | 1,181 | 1,639 |
| Deferred Tax Expense (Recovery) | (250) | 642 |
| 931 | 2,281 |
The decline in current income tax expense for 2023 was primarily due to lower earnings compared with 2022. The effective tax rate in 2023 was 18.5 percent (2022 – 26.1 percent). The lower rate is primarily due to the deferred tax recovery recorded in 2023 related to the recognition of tax attributes acquired in the Toledo Acquisition.
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.
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 legislation.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 34 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| QUARTERLY RESULTS | |||||||||
| --- | |||||||||
| 2022 | |||||||||
| --- | --- | --- | --- | --- | --- | ||||
| ( millions, except where indicated) | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |
| Average Commodity Prices (1) (US/bbl) | |||||||||
| Dated Brent | 84.05 | 86.76 | 78.39 | 81.27 | 88.71 | 100.85 | 113.78 | 101.41 | |
| WTI | 78.32 | 82.26 | 73.78 | 76.13 | 82.65 | 91.55 | 108.41 | 94.29 | |
| WCS at Hardisty | 56.43 | 69.35 | 58.74 | 51.36 | 56.99 | 71.69 | 95.61 | 79.76 | |
| Differential WTI-WCS at Hardisty | 21.89 | 12.91 | 15.04 | 24.77 | 25.66 | 19.86 | 12.80 | 14.53 | |
| Chicago 3-2-1 Crack Spread (2) | 13.24 | 26.06 | 28.57 | 28.88 | 32.87 | 38.87 | 46.50 | 18.35 | |
| RINs | 4.77 | 7.42 | 7.72 | 8.20 | 8.54 | 8.11 | 7.80 | 6.44 | |
| Upstream Production Volumes | |||||||||
| Bitumen (Mbbls/d) | 595.1 | 586.0 | 554.6 | 570.7 | 593.5 | 568.2 | 540.3 | 578.8 | |
| Heavy Crude Oil (Mbbls/d) | 17.5 | 15.6 | 17.0 | 16.8 | 15.8 | 16.8 | 16.4 | 16.2 | |
| Light Crude Oil (Mbbls/d) | 15.8 | 15.2 | 10.1 | 15.3 | 17.1 | 16.0 | 20.8 | 21.9 | |
| NGLs (Mbbls/d) | 34.2 | 35.6 | 26.7 | 33.4 | 38.5 | 32.1 | 36.7 | 37.6 | |
| Conventional Natural Gas (MMcf/d) | 876.3 | 867.4 | 729.4 | 857.0 | 852.0 | 868.7 | 882.2 | 865.3 | |
| Total Production Volumes (MBOE/d) | 808.6 | 797.0 | 729.9 | 779.0 | 806.9 | 777.9 | 761.5 | 798.6 | |
| Downstream Crude Oil Unit Throughput (3) (Mbbls/d) | 579.1 | 664.3 | 537.8 | 457.9 | 473.3 | 533.5 | 457.3 | 501.8 | |
| Downstream Production Volumes (Mbbls/d) | 627.4 | 706.0 | 571.9 | 487.7 | 506.3 | 572.6 | 482.1 | 538.0 | |
| Revenues | 13,134 | 14,577 | 12,231 | 12,262 | 14,063 | 17,471 | 19,165 | 16,198 | |
| Operating Margin (4) | 2,151 | 4,369 | 2,400 | 2,102 | 2,782 | 3,339 | 4,678 | 3,464 | |
| Cash From (Used in) Operating Activities | 2,946 | 2,738 | 1,990 | (286) | 2,970 | 4,089 | 2,979 | 1,365 | |
| Adjusted Funds Flow (4) | 2,062 | 3,447 | 1,899 | 1,395 | 2,346 | 2,951 | 3,098 | 2,583 | |
| Per Share - Basic (4) () | 1.10 | 1.82 | 1.00 | 0.73 | 1.22 | 1.53 | 1.57 | 1.30 | |
| Per Share - Diluted (4) () | 1.09 | 1.81 | 0.98 | 0.71 | 1.19 | 1.49 | 1.53 | 1.27 | |
| Capital Investment | 1,170 | 1,025 | 1,002 | 1,101 | 1,274 | 866 | 822 | 746 | |
| Free Funds Flow (4) | 892 | 2,422 | 897 | 294 | 1,072 | 2,085 | 2,276 | 1,837 | |
| Excess Free Funds Flow (4) | 471 | 1,989 | 505 | (499) | 786 | 1,756 | 2,020 | 2,615 | |
| Net Earnings (Loss) (5) | 743 | 1,864 | 866 | 636 | 784 | 1,609 | 2,432 | 1,625 | |
| Per Share - Basic () | 0.39 | 0.98 | 0.45 | 0.33 | 0.40 | 0.83 | 1.23 | 0.81 | |
| Per Share - Diluted () | 0.39 | 0.97 | 0.44 | 0.32 | 0.39 | 0.81 | 1.19 | 0.79 | |
| Total Assets | 53,915 | 54,427 | 53,747 | 54,000 | 55,869 | 55,086 | 55,894 | 55,655 | |
| Total Long-Term Liabilities | 18,993 | 18,395 | 19,831 | 19,917 | 20,259 | 19,378 | 20,742 | 21,889 | |
| Long-Term Debt, Including Current Portion | 7,108 | 7,224 | 8,534 | 8,681 | 8,691 | 8,774 | 11,228 | 11,744 | |
| Net Debt | 5,060 | 5,976 | 6,367 | 6,632 | 4,282 | 5,280 | 7,535 | 8,407 | |
| Cash Returns to Shareholders | 731 | 1,225 | 584 | 258 | 807 | 873 | 1,233 | 544 | |
| Common Shares – Base Dividends | 261 | 264 | 265 | 200 | 201 | 205 | 207 | 69 | |
| Base Dividends Per Common Share () | 0.140 | 0.140 | 0.140 | 0.105 | 0.105 | 0.105 | 0.105 | 0.035 | |
| Common Shares – Variable Dividends | — | — | — | — | 219 | — | — | — | |
| Variable Dividends Per Common Share () | — | — | — | — | 0.114 | — | — | — | |
| Purchase of Common Shares Under NCIB | 350 | 361 | 310 | 40 | 387 | 659 | 1,018 | 466 | |
| Payment for Purchase of Warrants | 111 | 600 | — | — | — | — | — | — | |
| Preferred Share Dividends | 9 | — | 9 | 18 | — | 9 | 8 | 9 |
All values are in US Dollars.
(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.
(3)Represents Cenovus’s net interest in refining operations.
(4)Non-GAAP financial measure or contains a non-GAAP financial measure. See the Specified Financial Measures Advisory of this MD&A.
(5)Net earnings (loss) for all periods in the table above is the same as net earnings (loss) from continuing operations.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 35 |
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The fourth quarter was highlighted by strong upstream performance, planned and unplanned outages in our downstream business, and financial results reflecting a declining commodity price environment.
•Upstream production averaged 808.6 thousand BOE per day, an increase from 797.0 thousand BOE per day in the third quarter of 2023, and our highest quarterly average since the fourth quarter of 2021.
•Downstream throughput decreased to 579.1 thousand barrels per day from 664.3 thousand barrels per day in the third quarter, largely driven by the planned turnaround and delayed startup at the Borger Refinery, and planned and unplanned outages at the Lima Refinery in the fourth quarter.
•WCS at Hardisty decreased from US$69.35 per barrel in the third quarter to US$56.43 per barrel, including a decrease in December to US$45.54 per barrel.
•The Chicago 3-2-1 crack spread declined significantly from US$26.06 per barrel in the third quarter to US$13.24 per barrel, the lowest quarterly average since the first quarter of 2021. The December 2023 average Chicago 3-2-1 crack spread was US$7.65 per barrel, the lowest monthly average since 2020.
•Operating Margin fell to $2.2 billion from $4.4 billion in the third quarter of 2023 and Adjusted Funds Flow decreased to $2.1 billion from $3.4 billion in the third quarter.
•We reduced Net Debt by $916 million from September 30, 2023, primarily due to cash from operating activities of $2.9 billion, capital investment of $1.2 billion and cash returns to shareholders of $731 million.
Fourth Quarter 2023 Results Compared with the Fourth Quarter 2022
The summary below compares financial and operating results for the three months ended December 31, 2023, compared with the same period in 2022.
Upstream Production Volumes
Total upstream production increased 1.7 thousand BOE per day in the fourth quarter of 2023 compared with the same period in 2022, primarily due to:
•Successful results from redevelopment programs at our Sunrise and Lloydminster thermal assets.
•Production from the MAC field in Indonesia that started in the third quarter of 2023, and the MBH and MDA fields that came online part way through the fourth quarter of 2022.
•The impact of well pads brought online at Foster Creek in the second and third quarters of 2023.
•The Terra Nova FPSO resuming production in late November.
The increases were partially offset by lower production at Christina Lake due to the timing of new wells pads in 2023 in addition to the suspension of production at the White Rose field as we prepared for the planned SeaRose ALE project in late December.
Downstream Refining Throughput and Production
Canadian Refining throughput increased 6.0 thousand barrels per day to 100.3 thousand barrels per day and refined product production increased 5.7 thousand barrels per day to 113.3 thousand barrels per day compared with 2022. Utilization at the Upgrader and Lloydminster Refinery was 90 percent and 92 percent, respectively (2022 – 84 percent and 89 percent, respectively). Operations were solid in the fourth quarter of 2023 compared with cold weather impacts and unplanned operational outages in the fourth quarter of 2022. The increases were partially offset by an unplanned outage at the Upgrader in October, which returned to full rates in November.
U.S. Refining throughput increased 99.8 thousand barrels per day to 478.8 thousand barrels per day and total refined product production increased 115.4 thousand barrels per day to 514.1 thousand barrels per day compared with 2022, primarily due to:
•An increase in throughput at the Toledo Refinery of 138.4 thousand barrels per day due to the Toledo Acquisition and the restart of the Toledo Refinery.
•Throughput of 32.4 thousand barrels per day because of the restart of the Superior Refinery.
The increases in throughput and production were partially offset by:
•The planned turnaround at the Borger Refinery completed in the fourth quarter of 2023 and an unplanned operational outage following the turnaround which resulted in slower than expected ramp up.
•Planned maintenance and a temporary unplanned outage at the Lima Refinery in the fourth quarter of 2023.
•Our ability to flex throughput across our refining network to optimize our margins.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 36 |
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Operating Margin
Three Months Ended December 31, 2023 and 2022
Operating Margin decreased $631 million to $2.2 billion in the fourth quarter of 2023, compared with 2022 primarily due to significantly lower market crack spreads and lower synthetic crude oil prices relative to crude oil feedstock impacting our downstream business. In addition, we processed feedstock from inventory purchased at higher prices in prior periods and recorded non-cash inventory write-downs on our refined products inventory in the fourth quarter. The decreases were partially offset by higher throughput and refined product production due to the Toledo Acquisition and the start-up of the Toledo and Superior refineries. Also offsetting the decrease was a higher Operating Margin from our upstream business mainly due to increased sales volumes, and higher realized pricing from the Oil Sands segment.
Cash From (Used in) Operating Activities and Adjusted Funds Flow
Cash from operating activities of $2.9 billion in the fourth quarter of 2023 was consistent with 2022, as the decrease in Operating Margin discussed above, was partially offset by changes in non-cash working capital. The net change in non-cash working capital in the fourth quarter of 2023 was $949 million, compared with a net change of $673 million in the fourth quarter of 2022. The increase in 2023 was mainly due to decreases in accounts receivable and inventory, partially offset by a decrease in accounts payable, primarily due to falling commodity prices.
Adjusted Funds Flow decreased to $2.1 billion in the fourth quarter of 2023 compared with $2.3 billion in 2022, primarily due to lower Operating Margin discussed above.
Net Earnings (Loss)
Net earnings were $743 million in the fourth quarter of 2023 compared with $784 million in 2022. The decrease was due to lower Operating Margin, partially offset by lower general and administrative costs and DD&A.
Capital Investment
Capital investment in the fourth quarter of 2023 was $1.2 billion (2022 – $1.3 billion), mainly related to:
•Sustaining activities and the drilling of stratigraphic test wells as part of our integrated winter program in the Oil Sands segment, in addition to the tie-back of Narrows Lake to Christina Lake and other growth projects at Foster Creek and Sunrise.
•Drilling, completion, tie-in and infrastructure projects in the Conventional segment.
•The West White Rose project in the Atlantic region.
•Sustaining activities at the Lima, Borger and Toledo refineries.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 37 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| OIL AND GAS RESERVES | ||||||||||||
| --- | As at December 31, 2023<br><br>(before royalties) (1) | Bitumen (2)<br><br>(MMbbls) | Light and Medium Oil<br><br>(MMbbls) | NGLs<br><br>(MMbbls) | Conventional<br><br>Natural Gas (3)<br><br>(Bcf) | Total<br><br>(MMBOE) | ||||||
| --- | --- | --- | --- | --- | --- | |||||||
| Total Proved | 5,411 | 38 | 74 | 2,062 | 5,866 | |||||||
| Probable | 2,487 | 125 | 40 | 1,100 | 2,836 | |||||||
| Total Proved Plus Probable | 7,899 | 163 | 114 | 3,162 | 8,702 | As at December 31, 2022<br><br>(before royalties) (1) | Bitumen (2)<br><br>(MMbbls) | Light and Medium Oil<br><br>(MMbbls) | NGLs<br><br>(MMbbls) | Conventional<br><br>Natural Gas (3)<br><br>(Bcf) | Total<br><br>(MMBOE) | |
| --- | --- | --- | --- | --- | --- | |||||||
| Total Proved | 5,592 | 42 | 82 | 2,194 | 6,082 | |||||||
| Probable | 2,448 | 129 | 39 | 1,029 | 2,787 | |||||||
| Total Proved Plus Probable | 8,040 | 171 | 121 | 3,223 | 8,869 |
(1)Totals may not sum due to rounding.
(2)Includes heavy crude oil that is not material.
(3)Includes shale gas that is not material.
Developments in 2023 compared with 2022 include:
•Bitumen gross total proved and gross total proved plus probable reserves decreased by 181 million barrels and 141 million barrels, respectively. The changes were due to current year production and recovery factor adjustments at Christina Lake and Foster Creek, partially offset by additions from regulatory approvals at Foster Creek and Lloydminster thermal, updates to the Sunrise development plan, an acquisition in the Oil Sands segment and improved recovery performance at Lloydminster thermal.
•Light and medium oil gross total proved and gross total proved plus probable reserves decreased by 4 million barrels and 8 million barrels, respectively. The changes were due to current year production and technical revisions, partially offset by additions from updates to the Atlantic region and Conventional segment development plans.
•NGLs gross total proved and gross total proved plus probable reserves decreased by 8 million barrels and 7 million barrels , respectively. The changes were due to current year production, partially offset by additions from updates to the Conventional segment development plans.
•Conventional natural gas gross total proved and gross total proved plus probable reserves decreased by 132 billion cubic feet and 61 billion cubic feet, respectively. The changes were due to current year production, partially offset by updates to the Conventional segment development plans and updates to gas contracts in Asia Pacific.
The reserves data is presented as at December 31, 2023, using an average of the forecast prices, inflation and exchange rate (“Average Forecast”) by McDaniel & Associates Consultants Ltd., GLJ Ltd. and Sproule Associates Limited. The Average Forecast is dated January 1, 2024. Comparative information as at December 31, 2022 uses the January 1, 2023, Average Forecast.
Additional information with respect to the evaluation and reporting of our reserves in accordance with National Instrument 51-101, “Standards of Disclosure for Oil and Gas Activities” is contained in our AIF for the year ended December 31, 2023. Our AIF is available on SEDAR+ at sedarplus.ca, on EDGAR at sec.gov and on our website at cenovus.com. Material risks and uncertainties associated with estimates of reserves are discussed in the Risk Management and Risk Factors section and the Advisory section of this MD&A.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 38 |
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| LIQUIDITY AND CAPITAL RESOURCES | |
| --- |
Our capital allocation framework enables us to strengthen our balance sheet, provide flexibility in both high and low commodity price environments, and deliver value to shareholders. The framework enables a shift to pay out a higher percentage of Excess Free Funds Flow to common shareholders, with lower leverage and a lower risk profile.
We expect to fund our near-term cash requirements through cash from operating activities, the prudent use of our cash and cash equivalents, and other sources of liquidity. This includes draws on our committed credit facility, draws on our uncommitted demand facilities and other corporate and financial opportunities which provide timely access to funding to supplement cash flow. We remain committed to maintaining our investment grade credit ratings at S&P Global Ratings, Moody’s Investor Service, Morningstar DBRS 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.
| ($ millions) | 2023 | 2022 |
|---|---|---|
| Cash From (Used In) | ||
| Operating Activities | 7,388 | 11,403 |
| Investing Activities | (5,295) | (2,314) |
| Net Cash Provided (Used) Before Financing Activities | 2,093 | 9,089 |
| Financing Activities | (4,313) | (7,676) |
| Effect of Foreign Exchange on Cash and Cash Equivalents | (77) | 238 |
| Increase (Decrease) in Cash and Cash Equivalents | (2,297) | 1,651 |
| As at December 31, | 2023 | 2022 |
| Cash and Cash Equivalents | 2,227 | 4,524 |
| Total Debt | 7,287 | 8,806 |
Cash From (Used in) Operating Activities
For the year ended December 31, 2023, cash from operating activities was $7.4 billion (2022 – $11.4 billion). The decrease was primarily due to lower Operating Margin and changes in non-cash working capital. During the year ended December 31, 2023, the net change in non-cash working capital decreased cash by $1.2 billion, primarily driven by the payment of the December 31, 2022, income tax liability of $1.2 billion in the first quarter of 2023.
Cash From (Used in) Investing Activities
Cash used in investing activities increased significantly in 2023 compared with 2022. The increase was partly due to higher capital spend, including acquisition capital. Acquisition capital was higher in 2023 with the closing of the Toledo Acquisition in the first quarter, which was partially offset by the Sunrise Acquisition in the third quarter of 2022. The increase was also due to minimal proceeds from divestitures in 2023, compared with the sales of our retail fuels network and the Tucker and Wembley assets in 2022. The net change in non-cash working capital, which includes the Sunrise contingent payments, decreased cash in 2023.
Cash From (Used in) Financing Activities
In 2023, we reduced debt through the purchase of US$1.0 billion of certain unsecured notes due between 2029 and 2047 at a discount of $84 million. In 2022, we purchased long-term debt of US$2.6 billion and C$750 million. We also returned $2.8 billion to shareholders in 2023 compared with $3.5 billion in 2022.
In 2023, we issued $58 million, net, of short-term borrowings (2022 – $34 million, net).
Working Capital
Excluding the current portion of the contingent payments, our adjusted working capital at December 31, 2023, was $3.7 billion (December 31, 2022 – $4.7 billion).
We anticipate that we will continue to meet our payment obligations as they come due.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 39 |
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Adjusted Funds Flow, Free Funds Flow and Excess Free Funds Flow
Adjusted Funds Flow is a non-GAAP financial measure commonly used in the oil and gas industry to assist in measuring a company’s ability to finance its capital programs and meet its financial obligations. Free Funds Flow is a non-GAAP financial measure used to assist in measuring the available funds Cenovus has after financing its capital programs. Excess Free Funds Flow is a non-GAAP financial measure used by the Company to deliver shareholder returns and allocate capital according to our shareholder returns plan.
| Three Months Ended December 31, | Year Ended December 31, | |||
|---|---|---|---|---|
| ($ millions) | 2023 | 2022 | 2023 | 2022 |
| Cash From (Used in) Operating Activities | 2,946 | 2,970 | 7,388 | 11,403 |
| (Add) Deduct: | ||||
| Settlement of Decommissioning Liabilities | (65) | (49) | (222) | (150) |
| Net Change in Non-Cash Working Capital | 949 | 673 | (1,193) | 575 |
| Adjusted Funds Flow | 2,062 | 2,346 | 8,803 | 10,978 |
| Capital Investment | 1,170 | 1,274 | 4,298 | 3,708 |
| Free Funds Flow | 892 | 1,072 | 4,505 | 7,270 |
| Add (Deduct): | ||||
| Base Dividends Paid on Common Shares | (261) | (201) | ||
| Dividends Paid on Preferred Shares | (9) | — | ||
| Settlement of Decommissioning Liabilities | (65) | (49) | ||
| Principal Repayment of Leases | (72) | (74) | ||
| Acquisitions, Net of Cash Acquired | (14) | (7) | ||
| Proceeds From Divestitures | — | 45 | ||
| Excess Free Funds Flow | 471 | 786 |
Returns to Shareholders Target
Maintaining a strong balance sheet with the resilience to withstand price volatility and capitalize on opportunities throughout the commodity price cycle is a key element of Cenovus’s capital allocation framework. We have set an ultimate Net Debt Target of $4 billion, which serves as our floor on Net Debt. 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 commodity pricing cycle. 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.
Share buybacks are 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, if the remainder is greater than $50 million. Where the value of share buybacks in a quarter is greater than or equal to the targeted value of returns, no variable dividend will be paid for that quarter.
On September 30, 2023, our long-term debt was $7.2 billion, and our Net Debt position was $6.0 billion. Therefore, our returns to shareholders target for the three months ended December 31, 2023, was 50 percent of the current quarter’s Excess Free Funds Flow of $471 million. Our target return was $236 million, which was exceeded through share buybacks of $350 million and warrant purchase payments of $111 million. As such, no variable dividend was declared for the first quarter of 2024.
| Three Months Ended | ||||
|---|---|---|---|---|
| ($ millions) | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 |
| Excess Free Funds Flow | 471 | 1,989 | 505 | (499) |
| Target Return | 236 | 995 | 253 | — |
| Less: Purchase of Common Shares Under NCIB | (350) | (361) | (310) | (40) |
| Less: Payment for Purchase of Warrants | (111) | (600) | — | — |
| Amount Available for Variable Dividend | — | 34 | — | — |
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 40 | |||
| --- | --- |
At December 31, 2023, our Net Debt position was $5.1 billion and as a result, our returns to shareholders target for the three months ended March 31, 2024, will be 50 percent of the first quarter’s Excess Free Funds Flow.
Short-Term Borrowings
As at December 31, 2023, the Company’s proportionate share drawn on the WRB uncommitted demand facilities was US$135 million (C$179 million) (December 31, 2022 – the Company’s proportionate share drawn was US$85 million (C$115 million)). There were no direct borrowings on our uncommitted demand facilities as at December 31, 2023, or December 31, 2022.
Long-Term Debt, Including Current Portion
Long-term debt, including the current portion, as at December 31, 2023, was $7.1 billion (December 31, 2022 – $8.7 billion). This includes U.S. dollar denominated unsecured notes of US$3.8 billion, or C$5.0 billion (December 31, 2022 – US$4.8 billion, or C$6.5 billion) and Canadian dollar denominated unsecured notes of $2.0 billion (December 31, 2022 – $2.0 billion). The decrease in long‑term debt was primarily due to the third quarter purchase of unsecured notes with an aggregate principal amount of US$1.0 billion at a discount of $84 million.
As at December 31, 2023, we were in compliance with all of the terms of our debt agreements.
Available Sources of Liquidity
The following sources of liquidity are available as at December 31, 2023:
| ($ millions) | Maturity | Amount Available |
|---|---|---|
| Cash and Cash Equivalents | n/a | 2,227 |
| Committed Credit Facility (1) | ||
| Revolving Credit Facility – Tranche A | November 10, 2026 | 3,700 |
| Revolving Credit Facility – Tranche B | November 10, 2025 | 1,800 |
| Uncommitted Demand Facilities | ||
| Cenovus Energy Inc. (2) | n/a | 1,071 |
| WRB (3) | n/a | 119 |
(1)No amounts were drawn on the committed credit facility as at December 31, 2023 (December 31, 2022 – $nil).
(2)Our uncommitted demand facilities include $1.7 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 at December 31, 2023, there were outstanding letters of credit aggregating to $364 million (December 31, 2022 – $490 million) and no direct borrowings (December 31, 2022 – $nil).
(3)Represents Cenovus's proportionate share of US$225 million available to cover short-term working capital requirements. As at December 31, 2023, US$135 million (C$179 million) of this capacity was drawn (December 31, 2022 – US$85 million (C$115 million)).
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.
Base Shelf Prospectus
On November 3, 2023, Cenovus filed a base shelf prospectus that allows the Company to offer, from time to time, debt securities, common shares, preferred shares, subscription receipts, warrants, share purchase contracts and units in Canada, the U.S. and elsewhere as permitted by law. The base shelf prospectus will expire in December 2025. Offerings under the base shelf prospectus are subject to market conditions on terms set forth in one or more prospectus supplements.
Financial Metrics
We monitor our capital structure and financing requirements using the Net Debt to Capitalization Ratio, Net Debt to Adjusted Funds Flow Ratio and Net Debt to Adjusted EBITDA Ratio. Refer to Note 25 of the 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 Shareholders 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 used in the Net Debt to Adjusted EBITDA Ratio, as net earnings (loss) before finance costs, net of capitalized interest, interest income, income tax expense (recovery), DD&A, E&E asset write-downs, goodwill impairments, (income) loss from equity-accounted affiliates, unrealized (gain) loss on risk management, net foreign exchange (gain) loss, revaluation (gain) loss, re-measurement of contingent payments, (gain) loss on divestiture of assets, and net other (income) loss calculated on a trailing twelve-month basis. These ratios are used to steward our overall debt position and are measures of our overall financial strength.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 41 | |
|---|---|---|
| As at | December 31, 2023 | December 31, 2022 |
| --- | --- | --- |
| Net Debt to Capitalization Ratio (percent) | 15 | 13 |
| Net Debt to Adjusted Funds Flow Ratio (times) | 0.6 | 0.4 |
| Net Debt to Adjusted EBITDA Ratio (times) | 0.5 | 0.3 |
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.
Our Net Debt to Capitalization Ratio as at December 31, 2023, increased compared with December 31, 2022, primarily due to higher Net Debt.
Our Net Debt to Adjusted Funds Flow Ratio and Net Debt to Adjusted EBITDA Ratio as at December 31, 2023, increased compared with December 31, 2022, as a result of higher Net Debt and lower Operating Margin. 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
Our common shares and 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.
As at December 31, 2023, there were approximately 1,871.9 million common shares outstanding (December 31, 2022 – 1,909.2 million common shares) and 36 million preferred shares outstanding (December 31, 2022 – 36 million preferred shares). Refer to Note 30 of the Consolidated Financial Statements for further details.
On November 7, 2023, the Company received approval from the TSX to renew the Company’s NCIB program to purchase up to 133.2 million common shares from November 9, 2023, to November 8, 2024.
| 2023 | 2022 | |
|---|---|---|
| Common Shares Purchased and Cancelled Under NCIB (millions of common shares) | 43.6 | 112.5 |
| Weighted Average Price per Common Share ($) | 24.32 | 22.49 |
| Purchase of Common Shares Under NCIB ($ millions) | (1,061) | (2,530) |
From January 1, 2024, to February 12, 2024, the Company purchased an additional 4.3 million common shares for $92 million. As at February 12, 2024, the Company can further purchase up to 118.3 million common shares under the existing NCIB.
As at December 31, 2023, there were approximately 7.6 million Cenovus Warrants outstanding (December 31, 2022 – 55.7 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 30 of the Consolidated Financial Statements for further details.
On June 14, 2023, we purchased and cancelled 45.5 million outstanding Cenovus Warrants. The price for each warrant purchased represented a price of $22.18 per common share, less the warrant exercise price of $6.54 per common share, for a total of $711 million. We also recorded $2 million of transaction costs. This purchase represented 84 percent of Cenovus’s outstanding warrants. The full warrant purchase obligation was paid by December 31, 2023.
Refer to Note 32 of the 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 February 12, 2024 | Units Outstanding<br><br>(thousands) | Units Exercisable<br><br>(thousands) |
|---|---|---|
| Common Shares | 1,867,826 | n/a |
| Cenovus Warrants | 7,614 | n/a |
| Series 1 First Preferred Shares | 10,740 | n/a |
| Series 2 First Preferred Shares | 1,260 | n/a |
| Series 3 First Preferred Shares | 10,000 | n/a |
| Series 5 First Preferred Shares | 8,000 | n/a |
| Series 7 First Preferred Shares | 6,000 | n/a |
| Stock Options | 12,852 | 7,615 |
| Other Stock-Based Compensation Plans | 19,230 | 1,772 |
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 42 | |
| --- | --- |
Common Share Dividends
In 2023, we paid base dividends of $990 million or $0.525 per common share (2022 – $682 million or $0.350 per common share). No variable dividend was declared or paid in 2023.
The Board declared a first quarter base dividend of $0.140 per common share, payable on March 28, 2024, to common shareholders of record as at March 15, 2024. The declaration of common share dividends is at the sole discretion of the Board and is considered quarterly.
Cumulative Redeemable Preferred Share Dividends
In 2023, dividends of $36 million were paid on the series 1, 2, 3, 5 and 7 preferred shares (2022 – $26 million). The declaration of preferred share dividends is at the sole discretion of the Board and is considered quarterly. The Board declared a first quarter dividend on the series 1, 2, 3, 5 and 7 preferred shares of $9 million, payable on April 1, 2024, to preferred shareholders of record as at March 15, 2024.
Contractual Obligations and Commitments
We have obligations for goods and services entered into in the normal course of business. Obligations that have original maturities of less than one year are excluded from the table below.
Our total commitments were $28.8 billion as at December 31, 2023 (December 31, 2022 – $33.0 billion). Total commitments decreased from December 31, 2022, primarily due to the cancellation of the contract terms of certain product purchase contracts, combined with the use of contracts. The decrease was partially offset by increased tolls due to the Trans Mountain Pipeline Expansion and commitments acquired as part of the Toledo Acquisition.
As at December 31, 2023, our total commitments included commitments with HMLP of $2.1 billion related to long-term transportation and storage commitments.
| As at December 31, 2023 | |||||||
|---|---|---|---|---|---|---|---|
| ($ millions) | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Total |
| Commitments | |||||||
| Transportation and Storage (1) | 2,018 | 1,927 | 1,680 | 1,663 | 1,641 | 15,738 | 24,667 |
| Product Purchases | 617 | — | — | — | — | — | 617 |
| Real Estate | 57 | 57 | 59 | 63 | 58 | 604 | 898 |
| Obligation to Fund HCML | 94 | 94 | 94 | 89 | 52 | 90 | 513 |
| Other Long-Term Commitments (2) | 417 | 194 | 184 | 175 | 166 | 965 | 2,101 |
| Total Commitments | 3,203 | 2,272 | 2,017 | 1,990 | 1,917 | 17,397 | 28,796 |
| Long-Term Debt (Principal and Interest) | 313 | 489 | 303 | 1,523 | 1,484 | 7,145 | 11,257 |
| Decommissioning Liabilities | 259 | 296 | 291 | 286 | 283 | 6,063 | 7,478 |
| Contingent Payment | 168 | — | — | — | — | — | 168 |
| Lease Liabilities (Principal and Interest) (3) | 438 | 367 | 345 | 294 | 275 | 2,635 | 4,354 |
| Total Commitments and Obligations | 4,381 | 3,424 | 2,956 | 4,093 | 3,959 | 33,240 | 52,053 |
(1)Includes transportation commitments that are subject to regulatory approval or were approved, but are not yet in service of $13.0 billion (December 31, 2022 – $9.1 billion). Terms are up to 20 years on commencement. Estimated tolls are subject to change pending review by the Canada Energy Regulator.
(2)The Company acquired $538 million of commitments as part of the Toledo Acquisition on February 28, 2023.
(3)Lease contracts related to railcars, barges, vessels, pipelines, caverns, storage tanks, office space, our commercial fuels network and other refining and field equipment.
As at December 31, 2023, outstanding letters of credit issued as security for performance under certain contracts totaled $364 million (2022 – $490 million). Subsequent to December 31, 2023, Cenovus entered into a new transportation commitment for $587 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 Consolidated Financial Statements.
Transactions with Related Parties
Cenovus holds a 35 percent interest in HMLP. As the operator of the assets held by HMLP, we provide management services for which we recover shared service costs in accordance with our profit sharing agreement. We are also the contractor for HMLP and construct its assets on a cost recovery basis with certain restrictions. For the year ended December 31, 2023, we charged HMLP $160 million for construction and management services (2022 – $188 million).
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 43 |
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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. Payments for access fees and transportation and storage services are made based on rates contractually agreed to with HMLP. For the year ended December 31, 2023, we incurred costs of $295 million for the use of HMLP’s pipeline systems, as well as for transportation and storage services (2022 – $263 million).
| RISK MANAGEMENT AND RISK FACTORS |
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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, without limitation, 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, repurchase our shares, pay dividends to our shareholders and fulfill our obligations (including debt servicing requirements) and/or may materially affect the market price of our securities.
Our Enterprise Risk Management (“ERM”) program drives the identification, measurement, prioritization, and management of our risks and is integrated with the Cenovus Operations Integrity Management System (“COIMS”). In addition, we continuously monitor our risk profile as well as industry best practices.
Risk Governance
The ERM Policy, approved by our Board, outlines our risk management principles and expectations, as well as the roles and responsibilities of all staff. Building on the ERM Policy, we have established risk management standards, a risk management framework and risk assessment tools, including the Cenovus Risk Matrix. Our risk management framework contains the key attributes recommended by the International Organization for Standardization (“ISO”) in its ISO 31000 – Risk Management Guidelines. The results of our ERM program are documented in semi-annual risk reports presented to our Board as well as through regular updates.
Risk Factors
The following discussion describes the financial, operational, regulatory, environmental, reputational, climate change related, and other risks related to Cenovus. Each risk identified in this MD&A may individually, or in combination with other risks, have a material impact on, among other things, our business, financial condition, results of operations, cash flows, reputation, access to capital, cost of borrowing, access to liquidity, ability to fund share repurchases, dividend payments and/or business plans, and/or the market price of our securities. These factors should be considered when investing in securities of Cenovus.
Financial Risk
Commodity Prices
Our financial performance is significantly dependent on the prevailing prices of crude oil, refined products, natural gas and NGLs. Prices for crude oil, refined products, natural gas and NGLs are impacted by a number of factors, including, but not limited to: global and regional supply of and demand for these commodities; the ability of producers and governments to replace reduced supply; transportation restrictions; processing and export capacity; export restrictions; domestic and global economic conditions; inflation and changes to interest rates; increased tariffs; central bank policies; market competitiveness; the actions of OPEC and other oil exporting nations, including, but not limited to, compliance or non-compliance with quotas agreed upon by OPEC members and decisions by OPEC not to impose production quotas on its members; the release and refilling of the U.S. Strategic Petroleum Reserves; developments related to the market for these commodities; inventory levels of these commodities; seasonal trends; refinery availability; planned and unplanned refinery maintenance; current and potential future environmental regulations, including regulations pertaining to the production and use of non-renewable resources; emissions, including, but not limited to carbon; market pricing and the accessibility and liquidity of these and related markets; prices and availability of alternate sources of energy; actions of domestic or foreign governments or regulatory bodies that may impact commodity prices; enforcement of government or environmental regulations; public sentiment towards the use of non- renewable resources; political stability and social conditions in countries producing these commodities; market access constraints and transportation interruptions; terrorist threats; technological developments; economic sanctions; outbreak or continuation of a pandemic, or war or other international or regional conflict and any related government action; the occurrence of natural disasters; and weather conditions.
The recent increase in focus on the timing and pace of the transition to a lower-carbon economy and resulting trends will likely affect global energy demand and usage, including the composition of the types of energy generally used by industry and individual consumers. Under certain aggressive low-carbon scenarios, potential demand erosion could contribute to commodity price fluctuations and structural commodity price declines. However, it is not currently possible to predict the timelines for, and precise effects of, the transition to a lower-carbon economy.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 44 |
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The financial performance of our oil sands operations could also be impacted by discounted or reduced commodity prices for our oil sands production relative to certain international benchmark prices, due, in part, to constraints on the ability to transport and sell products to domestic and international markets and the quality of oil produced. Of particular importance to us are diluent cost and supply and the price differentials between bitumen and both light to medium crude oil and heavy crude oil. Bitumen is more expensive for refineries to process and therefore generally trades at a discount to the market price for light to medium crude oil and heavy crude oil which, along with higher diluent costs, can adversely affect our financial condition.
The financial performance of our refining operations is also impacted by the relationship, or margin, between refined product prices and the prices of refinery feedstock. Refining margins are subject to seasonal factors as production levels change to match seasonal demand. Sales volumes, prices, inventory levels and inventory values will fluctuate accordingly. Future refining margins are uncertain and decreases in refining margins may have a negative impact on our business, results of operations, cash flows and financial condition.
All these factors are beyond our control and can result in a high degree of both cost and price volatility. Fluctuations in currency exchange rates further compound this volatility when the commodity prices, which are generally set in U.S. dollars, are stated in Canadian dollars. See “Foreign Exchange Rates” below.
Fluctuations in the commodity prices, associated price differentials, and refining margins may impact our ability to meet guidance targets, the value of our assets, our cash flows, the level of shareholder returns and our ability to maintain our business and fund projects. A substantial decline in these commodity prices or an extended period of low commodity prices may result in an inability to meet all our financial obligations as they come due; a delay or cancellation of existing or future drilling, development or construction programs; curtailment in production; unutilized long-term transportation commitments; and/or low utilization levels at our refineries. Fluctuations in commodity prices, associated price differentials, and refining margins impact our financial condition, results of operations, cash flows, growth, access to capital and cost of borrowing.
The commodity price risks noted above, as well as other risks such as market access constraints and transportation restrictions, reserves replacement and reserves estimates and cost management that are more fully described herein, may have a material impact on our business, financial condition, results of operations, cash flows and reputation, and may be considered indicators of impairment. Another potential indicator of impairment is the comparison of the carrying value of our assets to our market capitalization.
As discussed in this MD&A, we conduct an assessment, at each reporting date, of the carrying value of our assets in accordance with IFRS. If crude oil, refined product, natural gas and NGL prices decline significantly and remain at low levels for an extended period, or if the costs of our development of such resources significantly increase, the carrying value of our assets may be subject to impairment and our net earnings could be adversely affected.
Risks Associated with Financial Risk Management Activities
Our Board-approved Market Risk Management Policy allows Management to use approved derivative financial instruments as needed, within authorized limits, to help mitigate the impact of changes in crude oil and condensate prices and differentials, NGL and natural gas spreads, basis and prices, electricity prices, refined product and crack spread margins, as well as fluctuations in foreign exchange rates and interest rates. We may also use derivative instruments in various operational markets to help optimize our supply costs or sales of our production, or fixed-price commitments for the purchase or sale of crude oil, natural gas, NGLs and refined products.
These risk management activities may expose us to risks which may cause significant loss. These risks include but are not limited to: changes in the valuation of the risk management instrument being poorly correlated to the change in the valuation of the underlying exposures; change in price of the underlying commodity or market value of the instrument; lack of market liquidity; insufficient counterparties to transact with; counterparty default; deficiency in systems or controls; human error; the unenforceability of contracts; and any inability to fulfill our delivery obligations related to the underlying physical transaction. These financial instruments may also limit the benefit to us if commodity prices, interest or foreign exchange rates change.
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 3, 35 and 36 of the Consolidated Financial Statements.
Impact of Financial Risk Management Activities
Cenovus may employ various price alignment and volatility management strategies, including financial risk management contracts, to reduce volatility in future cash flows and improve cash flow stability.
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.
The discussion below summarizes the sensitivities of the fair value of our risk management positions to fluctuations in commodity prices and foreign exchange rates, with all other variables held constant. Management believes the price
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 45 |
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fluctuations identified below are a reasonable measure of volatility. The impact of the below 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 December 31, 2023 | Sensitivity Range | Increase | Decrease |
|---|---|---|---|
| Power Commodity Price | ± C$20.00/MWh (1) Applied to Power Hedges | 92 | (92) |
(1)One thousand kilowatts of electricity per hour (“MWh”).
A sensitivity analysis for the following fluctuating commodity prices and foreign exchange rates on the Company’s open risk management positions was found to result in a nominal unrealized gain (loss) impacting earnings before income tax:
•A US$10.00 per barrel increase or decrease in the benchmark crude oil and benchmark condensate commodity price (primarily WTI).
•A US$2.50 per barrel increase or decrease in the WCS (excluding the Hardisty location) and condensate differential price.
•A US$5.00 per barrel increase or decrease in the WCS differential price.
•A US$10.00 per barrel increase or decrease in refined products commodity prices.
•A US$1.00 per one thousand cubic feet increase or decrease in the Henry Hub commodity price.
•A US$0.50 per one thousand cubic feet increase or decrease in natural gas basis prices.
•A $0.05 increase or decrease in the U.S. to Canadian dollar exchange rate.
For further information on our risk management positions, see Notes 35 and 36 of the Consolidated Financial Statements.
Credit, Liquidity and Availability of Future Financing
The future development of our business may be dependent on our ability to obtain additional capital, including, but not limited to, debt and equity financing. Among other things, unpredictable financial markets, a sustained commodity price downturn or significant unanticipated expenses, or a change in law, market fundamentals, our credit ratings, business operations or investor or lender policy or sentiment, may impede our ability to secure and maintain cost-effective financing.
Capital markets are increasingly considering ESG matters, including those related to the transition to a lower carbon economy. Our ability to access capital and secure insurance coverage, at reasonable costs, or at all, may be adversely affected in the event that stakeholders adopt more restrictive decarbonization policies, we fail to achieve our GHG emissions reduction goals, or it is perceived that our GHG emissions reduction goals are insufficient or will not be achieved.
An inability to access capital, on terms acceptable to us, or at all, could affect our ability to make future capital expenditures, to maintain desirable financial ratios and to meet our financial obligations as they come due, potentially resulting in a material adverse effect on our business, financial condition, results of operations, cash flows, ability to comply with various financial and operating covenants, credit ratings and reputation.
Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic, business, regulatory, market and other conditions, some of which are beyond our control. If our operating and financial results are not sufficient to service current or future indebtedness, we may take actions such as: reducing or suspending share repurchases and/or dividends; reducing or delaying business activities, investments or capital expenditures; selling assets; restructuring or refinancing our debt; or seeking additional capital that could have less favourable terms.
We are required to comply with various financial and operating covenants under our credit facility and the indentures governing our debt securities. Non-compliance with these covenants may lead to restrictions on access to capital or accelerated repayment.
Credit Ratings
Our Company and our capital structure are regularly evaluated by credit rating agencies. Credit ratings are based on our financial and operational strength and several factors not entirely within our control, including, but not limited to, conditions affecting the oil and gas industry generally, industry risks associated with the transition to a lower-carbon economy, and the general state of the economy. There can be no assurance that one or more of our credit ratings will not be downgraded or withdrawn entirely by a rating agency.
A reduction in any of our credit ratings, particularly a downgrade below investment grade ratings, or a negative change in the Company's credit ratings outlook, could adversely affect the cost and availability of borrowing, and access to sources of liquidity and capital. A failure to maintain our current credit ratings could affect our business relationships with counterparties, operating partners, and suppliers.
If one or more of our credit ratings falls below certain ratings thresholds, we may be obligated to post additional collateral in the form of cash, letters of credit or other financial instruments to establish or maintain business arrangements. Failure to provide adequate credit risk assurance to counterparties and suppliers may result in foregoing or having contractual business arrangements terminated.
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Exposure to Counterparties
In the normal course of business, we enter contractual relationships with suppliers, partners, lenders, customers and other counterparties for the provision and sale of goods and services, in connection with our risk management activities, and in respect of asset or securities acquisitions and dispositions. If such counterparties do not fulfill their contractual obligations on a timely basis or at all, we may suffer financial losses or delays to our development plans, or we may have to forego other opportunities, all of which could materially impact our business, results of operations and financial condition.
Foreign Exchange Rates
Fluctuations in foreign exchange rates may affect our results, particularly the U.S./Canadian dollar and RMB/Canadian dollar exchange rates. Global prices for crude oil, refined products and natural gas are generally determined by reference to U.S. dollar benchmark prices. In addition, a significant portion of our long-term debt and interest expense is also denominated in U.S. dollars, while many of our operating and capital costs are in Canadian dollars. A portion of our long-term sales contracts in Asia Pacific are priced in RMB. A change in the value of the Canadian dollar relative to the U.S. dollar or the RMB will impact revenues and costs, as expressed in Canadian dollars. The Company periodically enters into foreign exchange transactions to manage our exposure to exchange rate fluctuations. However, the fluctuations in exchange rates are beyond our control and could have a material adverse effect on our cash flows, results of operations and financial condition.
Interest Rates
Market interest rates are impacted by actions taken by central banks to stabilize the economy and moderate inflation and have increased in response to inflation. Changes in interest rates could increase our net interest rate exposure and affect how certain liabilities are recorded, both of which could negatively impact our cash flow and financial results. We are also exposed to interest rate fluctuations upon the refinancing of maturing long-term debt and potential future financings at prevailing interest rates. We may periodically enter into transactions to manage our exposure to interest rate fluctuations.
Dividend Payments and Purchase of Securities
The payment of dividends, whether base, variable or preferred, 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 risks identified in the Risk Management and Risk Factors section of this MD&A. Specifically, in connection with Cenovus’s 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 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 and Excess Free Funds Flow, amount of share buybacks and other factors inherent with our capital allocation framework from time to time. Our Net Debt and Excess Free Funds Flow may vary from time to time as a result of, among other things, our business plans, results of operations, financial condition and impact of any of the risks identified in the Risk Management and Risk Factors section of this MD&A. 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 as the capital allocation framework, and any share repurchases and payment of dividends thereunder, remains at the discretion of our Board and is dependent on, among other things, the factors described above. 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.
Disclosure Controls and Procedures and Internal Control Over Financial Reporting (“ICFR”)
Based on their inherent limitations, disclosure controls and procedures and ICFR may not prevent or detect misstatements, and even those controls determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation. Failure to adequately prevent, detect and correct misstatements could have a material adverse effect on our business, financial condition, results of operations, cash flows and reputation.
Operational Risk
Operational Considerations (Safety, Environment and Reliability)
Our operations are subject to risks generally affecting the oil and gas, and refining industries and normally incidental to: (i) the storing, transporting, processing and marketing of crude oil, refined products, natural gas, NGLs and other related products; (ii) the drilling and completion of onshore and offshore crude oil and natural gas wells; (iii) the operation and development of crude oil and natural gas properties; (iv) the operation of refineries, terminals, pipelines and other transportation and distribution facilities in the jurisdictions in which we conduct our business, including at facilities operated by our partners or
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third-parties; and (v) the development and operation of projects relating to our GHG emissions reduction goals, including carbon capture utilization and storage projects. These risks include but are not limited to: the effects of government actions or regulations, policies and initiatives; encountering unexpected formations or pressures; premature declines of reservoir pressure or productivity; fires; flooding; geologic activity arising from fracking or carbon capture utilization and storage projects; explosions; blowouts; loss of containment; gaseous leaks; power outages; migration of harmful substances into water systems; releases or spills, including releases or spills from offshore operations, shipping vessels or other marine transport incidents; aviation, railcar or road transportation incidents; iceberg incidents; accidents or damage caused by third parties or otherwise occurring in the operation of our business; uncontrollable flows of crude oil, natural gas or well fluids; failure to follow operating procedures or operate within established operating parameters; adverse weather conditions; corrosion; pollution; freeze-ups and other similar events; the breakdown or failure of equipment, pipelines, facilities, wells and projects; the breakdown or failure of operational and information technology and systems and processes, any compromise thereof or released data; regular or unforeseen maintenance; the performance of equipment at levels below those originally intended; failure to maintain adequate supplies of spare parts; operator error; labour disputes; disputes with interconnected facilities and carriers; planned or unplanned operational disruptions or apportionment on third-party systems or refineries, which may prevent the full utilization of such party’s facilities and pipelines; spills at truck terminals and hubs; spills associated with the loading and unloading of potentially harmful substances; loss of product; unavailability of feedstock; price and quality of feedstock; epidemics or pandemics; protests, blockades or other acts of activism; catastrophic events, including, but not limited to, war or other regional or international conflict, adverse sea conditions, vandalism or terrorism, extreme weather events, wildfires and natural disasters and other accidents or hazards that may occur at or during transport to or from commercial or industrial sites.
Climate change may result in an increased level of operational risk requiring increased or additional mitigation measures. Systemic climatic changes or extreme climatic conditions may increase our exposure to, and magnitude of the impact of physical climate risks, such as floods, wildfires, earthquakes, hurricanes, storms, extreme temperatures and other extreme weather events or natural disasters. For example, the frequency and severity of wildfires may result in the shutting in and bringing down of our producing assets and processing plants. In addition, our Atlantic operations may be impacted by severe weather conditions, including winds, flooding and variable temperatures, which are contributing to the melting of northern ice and increased creation of icebergs. Severe weather conditions may result in an operational incident with the potential to result in spills, asset damage, and production or refining disruption. Our other operations are also subject to chronic physical risks such as a shorter timeframe for our winter drilling program, changes in the water table and reduced access to water due to drought conditions. A systemic change in temperature or precipitation patterns could result in more challenging conditions for the construction of ice roads, execution of our winter drilling program and reclamation activities and could reduce the availability of water due to the increasing likelihood of drought conditions.
If any such risks materialize, they may: interrupt operations; impair our ability to achieve our ESG targets, including our GHG emissions reduction goals; impact our reputation; cause loss of life or personal injury; result in loss of or damage to equipment, property, operational and information technology and control systems and data; cause environmental damage that may include polluting water, land or air; and may result in regulatory action, fines, penalties, civil suits or criminal or regulatory charges against us, any of which may have a material adverse effect on our business, financial condition, results of operations, cash flows and reputation.
In addition, our oil sands operations are susceptible to reduced production, slowdowns, shutdowns and restrictions on our ability to produce higher value products due to the interdependence of our component systems. Delineation of the resources, the costs associated with production, including drilling wells for SAGD operations, and the costs associated with refining oil can entail significant capital outlays. The operating costs associated with our oil sands production are largely fixed in the short-term and, as a result, operating costs per unit are largely dependent on levels of production.
We maintain a comprehensive insurance program in respect of our assets and operations. However, not all potential occurrences and disruptions in respect of our assets or operations are insured or are insurable, and we cannot guarantee that our insurance coverage will be available or sufficient to fully cover any claims that may arise from such occurrences or disruptions. The occurrence of an event that is not fully covered by our insurance program could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Market Access Constraints and Transportation Restrictions
Our production is transported through, and our refineries are reliant on, various pipelines and terminals, as well as rail, marine and truck networks, to transport feedstock and refined products to and from our facilities. Increased tariffs or disruptions in, or restricted availability of, pipeline, terminal, marine, rail or truck transport systems could limit the ability to deliver production volumes and adversely affect commodity prices, sales volumes and/or the prices received for our products, projected production growth, upstream or refining operations and cash flows. These interruptions and restrictions may be caused by, among other things, the inability of the pipeline or marine, rail or truck networks to operate, or may be related to capacity constraints if supply into the system exceeds the infrastructure capacity. There can be no certainty that third-party pipeline projects for new or expanded capacity will be constructed or that such projects would provide sufficient transportation
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capacity. Opposition to new and expanded pipeline projects have been influenced by, among other things, concerns about pipeline spills, GHG emissions and the transition to a lower carbon economy.
There is no certainty that rail, marine and truck transport and other alternative types of transportation for our production will be sufficient to address any gaps caused by operational constraints on the pipeline system. In addition, our rail, marine and truck shipments may be impacted by service delays, shortages of skilled labour, inclement weather, vessel, railcar or truck availability, railcar derailment, geopolitical factors, war, terrorism, or other international or regional conflict, or other rail, marine or truck transport incidents and could adversely impact sales volumes or the price received for product or impact our reputation or result in legal liability, loss of life or personal injury, loss of equipment or property or environmental damage. In addition, rail, marine and trucking regulations are constantly being reviewed to ensure the safe operation of the supply chain. Should regulations change, the costs of complying with those regulations will likely be passed on to shippers and may adversely affect our ability to transport by rail, marine or truck transport or the economics associated with such transportation. Finally, planned or unplanned shutdowns, outages or closures of our refineries or third-party systems or refineries may limit our ability to deliver product with negative implications on our business, financial condition, results of operations and cash flows.
Reserves Replacement and Reserve Estimates
If we fail to acquire, develop or find additional crude oil and natural gas reserves, our reserves and production will decline materially from their current levels. Our financial condition, results of operations and cash flows are highly dependent upon successfully producing from current reserves and acquiring, discovering or developing additional reserves. Exploring for, developing or acquiring reserves is capital intensive. To the extent our cash flow is insufficient to fund capital expenditures and external sources of capital become limited or unavailable, our ability to make the necessary capital investments to maintain and expand our crude oil and natural gas reserves will be impaired. In addition, we may be unable to find and develop or acquire additional reserves to replace our crude oil and natural gas production at acceptable costs.
There are numerous uncertainties inherent in estimating quantities of reserves, including many factors beyond our control. In general, estimates of economically recoverable crude oil and natural gas reserves and the future net cash flows and revenue derived therefrom are based on a number of variable factors and assumptions including, but not limited to: geological and engineering estimates; product prices; future operating and capital costs; historical production from the properties and the assumed effects of regulation by governmental agencies, including royalty payments and taxes, and environmental and emissions related regulations and taxes; initial production rates; production decline rates; and the availability, proximity and capacity of oil and gas gathering systems, pipelines, rail transportation and processing facilities, all of which may cause actual results to vary materially from estimated results.
All such estimates are uncertain, and classifications of reserves are only attempts to define the degree of uncertainty involved. For those reasons, estimates of the economically recoverable crude oil and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenue expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. Our actual production, revenues, taxes and development and operating expenditures with respect to our reserves may vary from current estimates and such variances may be material.
Estimates with respect to reserves that may be developed and produced in the future are often based on volumetric calculations and upon analogy to similar types of reserves, rather than upon actual production history. Subsequent evaluation of the same reserves based on production history will result in variations, which may be material, in the estimated reserves.
The production rate of oil and gas properties tends to decline as reserves are depleted while the associated operating costs increase. Maintaining an inventory of developable projects to support future production of crude oil and natural gas depends on, among other things: obtaining and renewing rights to explore, develop and produce oil and natural gas; drilling success; completing long-lead time capital intensive projects on budget and on schedule; and the application of successful exploitation techniques on mature properties. Our business, reputation, financial condition, results of operations and cash flows are highly dependent upon successfully producing current reserves and adding additional reserves.
Cost Management and Inflation
Development, operating and construction costs are affected by a number of factors including, but not limited to: development, adoption and success of new technologies, including those related to our GHG emissions reduction goals; inflationary price pressure; changes in regulatory compliance costs; scheduling delays; interruptions to existing market access infrastructure; failure to maintain quality construction and manufacturing standards; equipment limitations, including the cost or availability of oil and gas field equipment; commodity prices; higher steam-oil ratios in our Oil Sands operations; changing government or environmental policies; regulations and supply chain disruptions, including force majeure; and access to skilled labour and critical third-party services. In addition, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through corresponding increases in commodity prices and other sources of funding. Continued inflation and any governmental response thereto, such as the imposition of higher interest rates or wage controls, our inability to manage costs, or our inability to secure equipment, materials, skilled labour or third-party services necessary to
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our business activities for the expected price, on the expected timeline, or at all, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Technology, Information Systems and Data Privacy
We rely heavily on technology, including operating technology and information technology, to effectively operate our business. This includes on premise systems (such as networks, computer hardware and software), telecommunications systems, mobile applications, cloud services and other technology systems, networks, and services, including systems using artificial intelligence. Some systems and services are provided by third parties. In the event we are unable to access, use, rely upon, secure, upgrade, and take other steps to maintain or improve the efficiency, resiliency and efficacy of such systems and services, the operation of such systems and services could be interrupted, resulting in operational interruptions or the loss, corruption or release of data.
In the ordinary course of business, we collect, use and store sensitive data, including intellectual property, proprietary information, business information, and personal information. Despite our security measures, our technology systems, infrastructure, and services may be vulnerable to attacks (such as by hackers, cyberterrorists or other third parties), disruptions from staff or third-party error, malfeasance, natural disasters, acts of state or industrial espionage, activism, terrorism, war, regional or international conflict, or the geopolitical landscape. These risks also include, but are not limited to, cyber-related fraud or attacks such as attempts to circumvent electronic communications controls, impersonating internal personnel or business partners to divert payments and financial assets to accounts controlled by the perpetrators, or introducing ransomware into one or more systems or services to extract a payment, preventing access to systems, among others.
Any such incident, breach, or disruption of our internal or our third-party service providers’ technology systems or services, or other vendor technology systems and services (including where a threat actor is successful in bypassing our cyber-security measures and business process controls), could result in loss or the exposure of internal, confidential, business, financial, proprietary, personal or other sensitive information.
The rapid emergence and continuous evolution of generative artificial intelligence tools may exacerbate the Company’s technology, information systems and data privacy related risks due to its potential for user misuse, biased decision-making or unauthorized exposure of Cenovus’s sensitive data.
Cyber incidents, breaches or irresponsible use of technology or data, including through the irresponsible use of or reliance upon artificial intelligence tools, could result in business interruption, theft or misuse of confidential information, financial losses, remediation and recovery costs, legal claims or proceedings, liability under laws that govern data, its processing, or the decisions that may arise from same, including, laws related to data transfers, privacy and the protection of data, regulatory penalties or scrutiny, fines, operational disruption, site shut-down, leaks or other negative consequences, including damage to our reputation, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The regulation of technology is rapidly evolving across many of the jurisdictions in which we operate, creating a complex legal and regulatory framework, including existing and proposed laws and regulations that govern data, data processing and related tools, data transfers, artificial intelligence, data protection and privacy. These laws and regulations include obligations on companies that process personal information and provide additional rights of actions and remedies to individuals whose personal information is in the Company’s control.
Failure to comply with these regulatory standards, including the misuse of or failure to secure personal information, could result in violation of data protection, artificial intelligence and privacy laws and regulations, proceedings against the Company by governmental entities or others, imposition of severe fines and penalties by governmental authorities, damage to our reputation and credibility, and may have a negative impact on financial condition, results of operations and cash flows. Compliance with continuously evolving legislation may also result in increased operating costs.
Competition
The oil and gas industry is highly competitive in all aspects, including accessing capital, the exploration and development of new and existing sources of supply, the acquisition of crude oil and natural gas interests and the refining, distribution and marketing of oil and gas products. We compete with other producers, refiners and marketers, some of which may have lower operating costs or greater resources than our Company does. Competitors may develop and implement technologies which are superior to those we employ. The oil and gas industry also competes with other industries in supplying energy, fuel and related products to consumers, including renewable energy sources which may become more prevalent in the future. We may not be able to compete successfully against current and future competitors, and competitive pressures could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flows.
Project Execution
We manage a variety of growth and optimization projects across our global portfolio of assets. In addition, we have a number of other projects in various stages of planning and development, including projects related to our GHG emissions reduction goals. The wide range of risks associated with project development and execution, as well as the commissioning and integration of
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new facilities with existing assets, can impact the economic viability of our projects. These risks include, but are not limited to: our ability to obtain the necessary environmental and regulatory approvals; our ability to obtain favourable terms or to be granted access within land-use agreements; our ability to access, implement and use operational and information technologies and data, including improvements thereto; risks relating to schedule, resources and costs, including the availability and cost of materials, equipment and qualified personnel; the impact of supply chain disruptions; the impact of general economic, business and market conditions including inflationary pressures; the impact of weather conditions; risk related to the accuracy of project cost estimates; our ability to finance capital expenditures and expenses on a cost effective basis; our ability to identify or complete strategic transactions; and the effect of changing government regulation and public expectations in relation to the impacts of oil and gas operations on the environment and associated with GHG emissions abatement initiatives. The commissioning and integration of new infrastructure and facilities within our existing asset base could cause delays in achieving performance targets and objectives. Failure to manage these risks could affect our safety and environmental record and have a material adverse effect on our financial condition, results of operations and cash flows and reputation.
Joint Ventures and Partnerships
Some of our assets are not operated or controlled by us or are held in partnership with others, including through joint ventures. In addition, certain of our projects under development, including those related to our GHG emissions reduction goals, are expected to be constructed and operated in collaboration with third parties. Therefore, our results of operations, cash flows and progress towards our GHG emissions reduction goals may be affected by the actions of third-party operators or partners in areas where our ability to control and manage risks may be reduced. We rely on the judgment and operating expertise of our partners in respect of the development and operation of such assets and to provide information on the status of such assets and related results of operations; however, we are, at times, dependent upon our partners for the successful execution and operation of various projects and assets, their management of operational issues and their reporting.
Our partners may have objectives and interests that either do not align with or may conflict with our interests. No assurance can be provided that our future demands or expectations relating to such assets and projects will be satisfactorily met in a timely manner or at all. If a dispute with a partner or partners were to occur over the development and operation of a project, or if a partner or partners were unable to fund their contractual share of the capital expenditures, a project could be delayed, and we could be partially or totally liable for our partner’s share of the project. Should one of our partners become insolvent, we may similarly be directed by applicable regulators to carry out obligations on behalf of our partner and may not be able to obtain reimbursement for these costs. Failure to manage these partner risks could have a material adverse effect on our business, financial condition, results of operations, progress towards our GHG emissions reduction goals, reputation and cash flows.
Existing and Emerging Technologies
Current technologies used for the recovery of bitumen are energy intensive, including SAGD which requires significant consumption of natural gas, in the production of steam used in the recovery process. The amount of steam required in the recovery process varies and therefore impacts costs. The performance of the reservoir affects the timing and levels of production using SAGD technology. A large increase in recovery costs could cause certain projects that rely on SAGD technology to become uneconomical, which could have a negative effect on our business, financial condition, results of operations, and cash flows. In addition, we depend on, among other things, the availability and scalability of existing and emerging technologies to meet our business goals including our ESG targets and ambitions. Limitations related to the development, adoption and success of these technologies or the development of disruptive technologies could have a negative impact on our long-term business resilience.
Governmental Policy
Shifts in government policy by existing administrations or following changes in government in jurisdictions in which we operate or elsewhere can impact our operations and ability to grow our business. Restrictions on fossil fuel-based energy use, cross- border economic activity, and development of new infrastructure can impact our opportunities for continued growth. We are committed to working with all levels of government in the jurisdictions in which we operate to ensure we remain competitive and risks are understood, and mitigation strategies are implemented; however, we cannot guarantee the outcomes of changes in government policy which may adversely affect our business, results of operations, financial condition or reputation.
Regulatory Risk
The oil and gas industry in general and our operations in particular are subject to regulation and intervention under various levels of legislation in the countries in which we operate, seek to develop or explore in matters which include, but are not limited to: land tenure; permitting of projects; royalties; taxes (including income taxes); government fees; production rates; environmental protection; protection of certain species or lands; cumulative effects and/or impacts from all types of industrial development; environmental plans and regulations; the reduction of GHG and other emissions; the export of crude oil, natural gas and other products; the transportation of crude oil, natural gas and other products by pipeline, rail, marine or truck transport; generation, handling, storage, transportation, treatment and disposal of hazardous substance; the awarding,
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acquisition and maintenance of exploration, development and production rights; the imposition of specific drilling obligations; control over the development, abandonment and reclamation of fields (including restrictions on production) and/or facilities; and possible expropriation or cancellation of contract rights. See “Environmental Plans and Regulations Risks” below. Any changes to applicable regulatory regimes, including the implementation of new regulations or enforcement initiatives, or the modification or changed interpretation of existing regulations, could impact our existing and planned projects requiring increased capital investment, operating expenses or compliance costs, which could adversely impact our financial condition, results of operations, cash flows and reputation.
Regulatory Approvals
Our operations require us to obtain approvals from various regulatory authorities and there are no guarantees that we will be able to obtain and maintain on acceptable conditions, or at all, all necessary licenses, permits, and other approvals required to conduct activities (including, without limitation, certain exploration, development and operating activities) related to our projects. In addition, obtaining certain approvals from regulatory authorities can involve, among other things, stakeholder consultation, Indigenous consultation, consensus seeking, collaboration or consent, environmental impact assessments and public hearings. Regulatory approvals obtained may be subject to the satisfaction of certain conditions including, but not limited to: security deposit obligations; ongoing regulatory oversight of projects; mitigating or avoiding project impacts; environmental and habitat assessments; and other commitments or obligations. The failure to obtain applicable regulatory approvals or satisfy any conditions on a timely basis or satisfactory terms could result in increased costs, project delays, and may limit Cenovus’s ability to develop or expand proposed projects efficiently or at all.
Abandonment and Reclamation
We are subject to oil and gas asset abandonment, remediation and reclamation (“A&R”) liabilities for our operations, development and exploration, including those imposed by regulation under various levels of legislation in the jurisdictions in which we conduct operations, development or exploration.
We maintain estimates of our A&R liabilities; however, it is possible that these costs may change materially before decommissioning due to regulatory changes, technological changes, ecological risks, acceleration of decommissioning timelines, and inflation, among other variables. For our Atlantic Canada offshore operations, the present value cost for the expected scope of decommissioning and abandonment of the offshore wells and facilities is estimated based on known regulations, procedures and costs today for undertaking the decommissioning, the majority of which is projected to be incurred in the late 2030s.
In Alberta, Saskatchewan and British Columbia, the A&R liability regimes include orphan well funds that are funded through a levy imposed on licensees, including Cenovus, based on the licensees' proportionate share of deemed A&R liabilities for oil and gas facilities, wells and unreclaimed sites. The regulators in these jurisdictions may seek additional funding for such liabilities from industry participants, including Cenovus.
We have an ongoing environmental monitoring program of owned and leased retail locations, and former owned or leased retail locations where we have retained environmental liability, and perform remediation where required to comply with contractual and legal obligations. The costs of such remediation may not be determinable due to the unknown timing and extent of corrective actions that may be required.
The impact on our business of any legislative, regulatory or policy decisions relating to the A&R liability regulatory regime in the jurisdictions in which we conduct operations, development or exploration cannot be reliably or accurately estimated. Any cost recovery or other measures taken by applicable regulatory bodies may impact Cenovus and could materially and adversely affect, among other things, our business, financial condition, results of operations and cash flows.
Royalty Regimes
Our cash flows may be directly affected by changes to royalty and mineral tax regimes. The governments of the jurisdictions where we have producing assets receive royalties on the production of hydrocarbons from lands in which they respectively own the mineral rights and which we produce under agreement with each respective government. Government regulation of royalties and mineral tax is subject to change for a number of reasons, including, among other things, political factors. In Canada, there are certain provincial mineral taxes payable on hydrocarbon production from lands other than Crown lands. The potential for changes in the royalty and mineral tax regimes applicable in the jurisdictions in which we operate, or changes to how existing royalty and mineral tax regimes are interpreted and applied by the applicable governments, creates uncertainty relating to the ability to accurately estimate future royalty rates or mineral taxes and could have a significant impact on our business, financial condition, results of operations and cash flows. An increase in the royalty rates or mineral taxes in jurisdictions where we have producing assets would reduce our earnings and could make, in the respective jurisdiction, future capital expenditures or existing operations uneconomic and may reduce the value of our associated assets.
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Indigenous Land and Rights Claims
Opposition by Indigenous people to our Company, our operations, development or exploration, or disagreements between Indigenous communities, or between Indigenous peoples and governments, in the jurisdictions in which we conduct business may adversely impact our reputation, relationship with host governments, local communities and other Indigenous communities. Other impacts may include diversion of Management’s time and resources, increased legal, regulatory and other advisory expenses, and our ability to explore, develop and continue to operate projects.
In Canada, Indigenous and/or treaty rights held by Indigenous peoples are protected under the constitution. Impacts to these Indigenous and treaty rights must be considered, in particular in areas where Cenovus operates on Crown lands. In some cases, there may be outstanding Indigenous and treaty rights claims, which may include land title claims, on lands where we operate, and such claims, if successful, could have a material adverse impact on our operations or pace of growth.
The Canadian federal and provincial governments have a duty to consult with Indigenous people when contemplating actions that may adversely affect the asserted or proven Indigenous rights or affect treaty rights and, in certain circumstances, accommodate their interests. The scope of the duty to consult by federal and provincial governments varies with the circumstances and is often the subject of ongoing litigation the result of which may affect the way governments are required to fulfill their duty to consult. The fulfillment of the duty to consult Indigenous people and any associated accommodations may adversely affect our ability to, or increase the timeline to, obtain or renew permits, leases, licenses and other approvals, or to meet the terms and conditions of those approvals.
In addition, the Canadian federal government and the British Columbia provincial government have passed legislation which requires such governments to take all necessary measures to implement the United Nations Declaration on the Rights of Indigenous Peoples (“UNDRIP”). The means and timelines associated with UNDRIP’s implementation by government is ongoing and, in some instances, uncertain: additional processes have been and are expected to continue to be created, or legislation amended or introduced associated with project development and operations, further increasing uncertainty with respect to project regulatory approval timelines and requirements.
Climate Change Related Risks
There is growing international concern regarding climate change and a significant increase in focus on the timing and pace of the transition to a lower-carbon economy. Governments, financial institutions, insurance companies, non-governmental organizations (“NGOs”), environmental and governance organizations, institutional investors, social and environmental activists, shareholders and individuals are increasingly seeking to implement, among other things, regulatory and policy changes, changes in investment patterns, and modifications in energy consumption habits and trends which, individually and collectively, are intended to or have the effect of accelerating the reduction in the global consumption of fossil fuel-based energy, the conversion of energy usage to less carbon- intensive forms and the general migration of energy usage away from fossil fuel-based forms of energy.
Climate change and its associated impacts may increase our exposure to, and magnitude of, each of the risks identified in the Risk Management and Risk Factors section of this MD&A. Overall, we are not able to estimate at this time the degree to which climate change-related regulatory, climatic conditions, and climate-related transition risks could impact our business, financial condition, and results of operations. Our business, financial condition, results of operations, cash flows, reputation, access to capital and insurance, cost of borrowing, ability to fund dividend payments and/or business plans may, in particular, without limitation, be adversely impacted as a result of climate change and its associated impacts.
Climate Change Regulations
We operate in several jurisdictions that regulate or have proposed to regulate GHG emissions, often with a view to transitioning to a lower-carbon economy. Some of these regulations are in effect, while others remain in various phases of review, discussion or implementation. Uncertainties exist relating to the timing and effects of these emerging regulations and other contemplated legislation, including how they may be harmonized, making it difficult to accurately determine the cost impacts. Additional changes to climate change legislation may adversely affect our business, financial condition, results of operations and cash flows, which cannot be reliably or accurately estimated at this time.
The Government of Canada has announced the carbon tax will increase to $170/tonne CO2e by 2030 from the 2023 rate of $65/tonne. The 2024 rate is $80/tonne CO2e and took effect on January 1, 2024. To the extent a province's carbon pricing system does not meet the federal stringency requirements, the federal “backstop” regulations apply. Most of our Canadian-based large emitting facilities operate in jurisdictions where provincial carbon pricing regulations apply to industry. In British Columbia, the provincial carbon pricing system applies in full. In Alberta, Saskatchewan, and Newfoundland and Labrador, the provincial carbon pricing systems apply in part. These provincial programs are expected to continue to meet the federal stringency requirements such that the federal backstop regulations do not apply. The federal government has committed to engaging provinces, territories, and Indigenous organizations in an interim review of the federal carbon tax benchmark by 2026.
In December 2023, the Government of Canada announced plans to implement a national emissions cap-and-trade model under the Canadian Environmental Protection Act (“CEPA”). The proposal is to phase in the cap-and-trade system between 2026 and
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2030 and have it apply to, among other things, all direct GHG emissions from liquified natural gas facilities and upstream oil and gas facilities, including offshore facilities, while also accounting for indirect emissions and emissions that are captured and permanently stored. It is currently proposed that the 2030 emissions cap (which will inform the number of emission allowances issued to regulated facilities) will be set at 35 percent to 38 percent below 2019 emission levels. Under the proposed regime, facilities that emit more than the allowances allocated would have some flexibility to compensate for a limited quantity of additional emissions, up to the level of the legal upper bound, which, for 2030, is proposed to be set at 20 percent to 23 percent below 2019 emission levels. The Government of Canada has committed to regularly reviewing the emissions cap trajectory, the emissions trading market, and access to compliance flexibilities in setting the allowance level and legal upper bound for the post-2030 period with a view to its long-term objective of achieving net-zero GHG emissions in the oil and gas sector by 2050. Draft regulations for the cap-and-trade system are scheduled to be released for comment in mid-2024.
The Government of Canada has also implemented regulations to reduce methane emissions from the crude oil and natural gas sector. The Regulations Respecting Reduction in the Release of Methane and Certain Volatile Organic Compounds (Upstream Oil and Gas Sector) (“Methane Regulation”) are designed to achieve a 40 percent to 45 percent reduction from 2012 levels by 2025 through both requirements for fugitive equipment leaks and venting from well completion and compressors (which came into force on January 1, 2020), and restrictions on facility production venting restrictions and venting limits for pneumatic equipment (which came into force on January 1, 2023). In December 2023, the Government of Canada published draft amendments to the Methane Regulation to facilitate achieving an additional target to reduce oil and gas methane emissions by at least 75 percent below 2012 levels by 2030. The proposed regulatory amendments relate to venting, flaring, hydrocarbon gas destruction equipment and fugitive emissions, and would come into force between 2027 and 2030. Finalized amendments to the Methane Regulation are expected in late 2024.
The U.S. does not have federal legislation establishing targets for the reduction of, or setting individualized limits on, GHG emissions from our U.S. facilities. The Renewable Fuel Standard (“RFS”) was created to reduce GHG emissions and risks from that program are described below. Additionally, the federal Environmental Protection Agency (“EPA”) has and may continue to promulgate regulations concerning the reporting and control of GHG emissions. Since 2010, the EPA’s Greenhouse Gas Reporting Program (“GHGRP”) requires any facility releasing more than 25,000 tonnes of CO2e emissions per year to report those emissions on an annual basis. In addition to reporting direct CO2e emissions, the GHGRP requires refineries to estimate the CO2e emissions from the potential subsequent combustion of the refinery’s products. The U.S. has a 2030 target to reduce GHG emissions by 50 percent to 52 percent from 2005 levels. It is expected that this target will be met largely through clean energy incentives introduced under the Inflation Reduction Act as opposed to regulatory measures.
Negative consequences which could arise as a result of changes to the current regulatory environment include, but are not limited to, changes in environmental and emissions regulation of current and future projects by governmental authorities, which could result in changes to facility design and operating requirements, potentially increasing the cost of construction, operation and abandonment. Other possible effects from emerging regulations may also include, but are not limited to: increased compliance costs; permitting delays; shift away from fossil fuel-based energy; and substantial costs to generate or purchase emission credits or allowances, all of which may increase operating expenses. Further, emission allowances or offset credits may not be available for acquisition or may not be available on an economic basis, required emissions reductions may not be technically or economically feasible to implement, in whole or in part, and failure to have access to resources or technology to meet emissions reduction requirements or other compliance mechanisms may have a material adverse effect on our business resulting in, among other things, fines, permitting delays, penalties, shutting in production and the suspension of operations.
The extent and magnitude of any adverse impacts of current or additional programs or regulations beyond reasonably foreseeable requirements cannot be reliably or accurately estimated at this time, in part because specific legislative and regulatory requirements have not been finalized and uncertainty exists with respect to the additional measures being considered and the timeframes for compliance. Consequently, no assurances can be given that the effect of future climate change regulations will not be significant to us.
Clean Fuel Regulations
In Canada, the Clean Fuel Regulations came into force in June 2022. The aim of this regulation is to lower the GHG emissions from various liquid fossil fuels by requiring producers or importers of gasoline, diesel, kerosene, and light and heavy fuel oils (“Primary Suppliers”) to lower the carbon intensity of such fuels. The regulation sets a baseline carbon intensity for each type of liquid fossil fuel, against which the Primary Suppliers must make annual carbon intensity reductions. Starting in 2022, each Primary Supplier must reduce the carbon intensity by the prescribed amount. In 2024, that amount is 90.0 gCO2e/MJ for gasoline fuels and 88.0 gCO2e/MJ for diesel fuels. These regulations could result in the negative consequences noted above under “Climate Change Regulations”, including increased compliance costs, increased operating, and capital expenditures.
Low Carbon Fuel Standards
Existing and proposed environmental legislation and regulation developed by certain U.S. states, Canadian provinces and territories, the Canadian federal government and members of the European Union, regulating carbon fuel standards could
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result in increased compliance costs and a potential reduction in revenue. Existing and proposed regulations may negatively affect the marketing of our bitumen, crude oil or refined products (diesel and ethanol), and may require us to purchase low carbon fuel compliance credits in order to ensure compliance and support sales within such jurisdictions. These regulations have the potential to impact our business, financial condition, results of operations and cash flows.
Renewable Fuel Standards
Our U.S. refining operations are subject to various laws and regulations that impose stringent and costly requirements. The EPA has implemented the RFS program that mandates that a certain volume of renewable fuel replace or reduce the quantity of certain petroleum-based transportation fuels sold or introduced in the U.S. Obligated Parties, including refiners or importers of gasoline or diesel fuel, must achieve compliance with targets set by the EPA by blending certain types of renewable fuel into transportation fuel, or by purchasing RINs from other parties on the open market. RINs are credits used for compliance and are the “currency” of the RFS program.
Cenovus and our refinery operating partners comply with the RFS by blending renewable fuels manufactured by third parties and by purchasing RINs on the open market, where prices fluctuate. We cannot predict the future prices of RINs and renewable fuel blend stocks, and the costs to obtain the necessary RINs and blend stocks could be material. Our financial position, results of operations and cash flows may be materially impacted if we are required to pay significantly higher prices for RINs or blend stocks to comply with the RFS mandated standards.
Clean Electricity Regulations
In August 2023, the Government of Canada released draft Clean Electricity Regulations intended to accelerate progress towards a near-zero power generation sector in Canada. The draft regulations would impose a stringent performance standard on all power generation facilities on the latter of January 1, 2035 or 20 years after their commissioning date. Limited exemptions for peaking units and emergency circumstances are available under the proposed regulations, but natural gas-fired facilities will be required to convert to near-zero emissions hydrogen or install carbon capture and coal-fired units will no longer be able to legally operate. The extent of any adverse impacts of these regulations cannot be reliably or accurately estimated at this time.
Light-Duty Vehicle Greenhouse Gas Emission Standards
The U.S. EPA has mandated federal GHG emissions standards applicable to automakers by setting fuel economy standards related to passenger cars and light trucks for Model Years 2023 through 2026. The EPA’s stated intention for the rule is to prompt automakers to produce more electric vehicles and set a path to a zero-emissions transportation future. The EPA stated that it intends to initiate future rulemaking to establish multi-pollutant emissions standards for Model Year 2027 and beyond. The impact these standards may have on the future demand (and corresponding price levels) for our products is unknown and dependent upon a number of factors. In addition, the Canadian federal government has published proposed regulated sales targets for electric vehicles.
Climate Scenarios and Assumptions
We integrate the potential impact of climate change and GHG regulations and the cost of carbon at various price levels into our business planning processes. To mitigate uncertainty surrounding future emissions regulation, we evaluate our development plans under a range of carbon-constrained scenarios. We have considered the International Energy Agency (“IEA”) scenarios in our strategic planning for several years and conduct ongoing assessments of both public and private scenarios. Although Management believes that our climate-related estimates are reasonable, aligned with current, pending and potential future regulations, and informed by the IEA's climate scenarios, they are based on numerous assumptions that, if false, may have a material adverse effect on our business, financial condition and results of operations. Specifically, climate-related estimates influence our financial planning and investment decisions. Since we plan and evaluate opportunities partially on the basis of climate-related estimates, variations between actual outcomes and our expectations may have a material adverse effect on our business, financial condition, results of operations, reputation and cash flows.
Labour Relations
We depend on unionized labour for the operation of certain facilities and may be subject to employee relations and labour disputes, which could disrupt operations at such facilities. As of December 31, 2023, approximately 11 percent of our employees are represented by unions under collective bargaining agreements, which includes just over 44 percent of our U.S. workforce. At unionized worksites, there is risk that strikes or work stoppages could occur. Any strike or work stoppage (for any reason, including a health and safety shutdown) may have a material adverse effect on our business, safety, reputation, financial condition, results of operations and cash flows.
In the event of a labour dispute, strike or work stoppage, mitigation and emergency operation plans may involve significant additional expenditures to ensure continuity of operations. In addition, we may not be able to renew or renegotiate collective bargaining agreements on satisfactory terms, or at all, and a failure to do so may increase our costs. Any renegotiation of our
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existing collective bargaining agreements may result in terms that are less favourable to us, which may materially and adversely affect our financial condition, results of operations and cash flows.
Moreover, future unionization efforts of Cenovus’s non-represented workforce or changes in legislation and regulations may result in labour shortages, higher labour costs, as well as wage, benefit, and other employment consequences, especially during critical maintenance and construction periods, all of which may have a material adverse effect on our safety and reliability performance, results of operations and cash flows and may limit our operational flexibility.
Leadership and Talent
Our success is dependent upon our Management, our leadership capabilities and the quality and competency of our workforce. If we are unable to attract and retain key personnel and critical and diverse talent with the necessary behaviors and leadership, professional and technical competencies, it could have a material adverse effect on our business, financial condition, results of operations, reputation, and our ability to meet our leadership related ESG targets.
Security and Terrorist Threats
Security threats and terrorist activities may impact our personnel, or those of partners, customers, and suppliers, which could result in injury, loss of life, extortion, hostage situations and/or kidnapping or unlawful confinement, destruction or damage to property of Cenovus or others, impact to the environment, and business interruption. A security threat or terrorist attack targeted at a facility, terminal, pipeline, rail or trucking network, office or offshore vessel/installation owned or operated by Cenovus or any of our systems, services, infrastructure, market access routes, or partnerships could result in the interruption or cessation of key elements of our operations. Outcomes of such incidents could have a material adverse effect on our business, financial condition, results of operations and cash flows.
International Developments and Geopolitical Risk
We are exposed to the financial and operational risks associated with uncertain international and regional relations. Our business includes Asia Pacific assets in the South China Sea and the Madura Strait offshore Indonesia, and includes cooperation agreements with China National Offshore Oil Corporation or its subsidiaries (collectively, “CNOOC”), which also operates certain of these assets.
Political developments impacting international trade, including trade disputes, increased tariffs and sanctions, particularly between the U.S. and China, and Canada and China, may negatively impact markets and cause weaker macroeconomic conditions or drive political or national sentiment, weakening demand for crude oil, natural gas and refined products.
We may be affected by changes to bilateral relationships, the frameworks and global norms that govern international trade and other geopolitical developments. This includes acute shocks (such as civil unrest or sanctions) and chronic stresses (such as political or business disputes and other forms of conflict, including military conflict) that may pose longer-term threats to our business. Unilateral action by, or changes in relations between, countries in which we operate, including the U.S. and China, and such countries’ approaches to multilateralism and trade protectionism can impact our ability to access markets, technology, talent and capital. Disruptions or unanticipated changes of this nature may affect our ability to sell our products for optimum value or access inputs required for effective operations and have the potential to adversely affect our financial condition.
Increased tensions between the U.S. and China caused by escalated military exercises around Taiwan and the South China Sea could lead to geopolitical uncertainty in the area, which may negatively impact our China business and operations, and ultimately affect our financial condition.
Moreover, our operations may be materially adversely affected by political, economic or social instability or events, including the renegotiation or nullification of agreements and treaties, the imposition of onerous regulations, embargoes, sanctions, and fiscal policy, changes in laws governing existing operations, financial constraints, including currency restrictions and exchange rate fluctuations, unreasonable taxation and the behaviour of international public officials, joint venture partners or third-party representatives. Specifically, our Asia Pacific assets expose us to the effects of the changing U.S.-China, Canada-China and EU- China relations.
In response to foreign sanctions, China has enacted multiple blocking laws intended to diminish the effectiveness and impact of foreign trade sanctions. Specifically, China has enacted regulations granting itself the ability to unilaterally nullify the effects of certain foreign restrictions that are deemed to be unjustified to Chinese nationals and entities, which came into force on January 9, 2021. Additionally, on June 10, 2021, China enacted the Anti-Foreign Sanctions Law which grants the right to take corresponding countermeasures if a foreign country violates international law and basic norms of international relations or adopts discriminatory restrictive measures against Chinese nationals and entities and interferes in China's internal affairs. The language of the Anti-Foreign Sanctions Law is very broad, and beyond the laws themselves, little guidance has been provided regarding how the blocking laws will be enforced by the Chinese government and effectuated through the private rights of action created by these laws. The breadth and lack of specificity of such laws create additional risk and uncertainty for foreign companies operating in China, as they may result in conflicting rules and regulations in home and host countries.
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Although formal export restrictions imposed against China and Chinese entities (including the placement of CNOOC on the U.S. Department of Commerce’s Entity List) have not so far had a material impact on our business activities in Asia, increased export restrictions on China and Chinese entities may limit the range of certain supplies to our operations in Asia and have an adverse effect on operational efficiency, results of operations, financial condition or reputation.
It is possible that additional related actions taken by the U.S. (and its trading partners and allies), Canada, China and other nations may limit or restrict foreign companies' ability to participate in projects and operate in certain sectors of the Chinese economy, including the energy sector. The nature, extent and magnitude of the effect of dynamic trade relations cannot be accurately predicted and may have a material adverse impact on our business, prospects, financial condition, and results of operations, cash flows, and reputation.
U.S. and Canadian sanctions and trade controls related to China do not currently prevent or significantly impair our offshore operations in Asia, but they could do so in the future, particularly if U.S. sanctions and trade controls against CNOOC were to be expanded. We cannot accurately predict the implementation of U.S. or Canadian policy affecting any current or future activities by CNOOC, Cenovus's other international partners or Cenovus. Similarly, we cannot accurately predict whether U.S. restrictions will be further tightened or the impact of government action on Cenovus's offshore operations in Asia. It is possible that the U.S. or Canadian government may subject CNOOC or Cenovus's other international partners to restrictions or sanctions that may adversely impact our offshore operations in Asia.
In addition, to the extent there are business disputes or legal claims involving our business in China, there is the potential for Cenovus personnel to be subject to an entry/exit ban in China. Moreover, it is possible that, as a result of our partnership with CNOOC, we may be subject to negative media attention which may affect investors’ perception of Cenovus in Canada, the U.S. and globally, and which may negatively affect our share price and reputation.
Geopolitical events, such as a shift in the relationship, an escalation or imposition of sanctions, tariffs or other trade tensions between the U.S. and China, and Canada and China, may affect the supply, demand and price of crude oil, natural gas and refined products and therefore our financial condition. The timing, extent and fallout of the ongoing tensions between the U.S. and China, as well as Canada and China, remain uncertain and the impact on our business is unknown.
Shifts in global power relations may also introduce greater uncertainty with respect to issues requiring global co-ordination (such as climate change, trade agreements, tax regulation, freedom of navigation and technology regulation), as well as raise questions on the efficacy of and trust in international institutions, including those that underpin international trade. These types of changes may cause restrictions or impose costs on our business and may inhibit our future opportunities or affect our financial condition.
Our financial condition, operations and business may be adversely affected by any of the foregoing risks associated with international relations and specifically those risks arising from evolving U.S.-China, Canada-China and EU-China relations. The nature, extent and magnitude of the effect of dynamic trade relations on us cannot be accurately predicted and may have a material adverse impact on our business, prospects, financial condition, results of operations, cash flows, and reputation.
Litigation and Claims
From time to time, we may be involved in demands, disputes, regulatory investigations or proceedings, arbitrations and/or litigation (“Claims”) arising out of, or related to, our operations and other contractual relationships. Claims may be material. Due to the nature of our operations, we may be involved with various types of Claims including, but not limited to, failure to comply with applicable laws and regulations including those related to health and safety, climate change, the environment, breach of contract, negligence, product liability, antitrust, bribery and other forms of corruption, tax, securities class actions, derivative actions, patent infringement, privacy, employment, human rights, labour relations, personal injury and other claims.
In recent years there has been an increase in climate change related demands, disputes and litigation in various jurisdictions including the U.S. and Canada. While many of the climate change related actions are in preliminary stages of litigation, and in some cases assert novel or untested causes of action, there can be no assurance that legal, societal, scientific and political developments will not increase the likelihood of successful climate change related litigation against energy producers, including Cenovus. We may be subject to adverse publicity associated with such matters, which may negatively affect public perception and our reputation, regardless of whether we are ultimately found responsible.
We may be required to incur substantial expenses and devote significant resources in respect of any such Claims. In addition, any such Claims could result in unfavourable judgments, decisions, fines, sanctions, penalties, monetary damages, temporary or permanent suspensions of operations or restrictions on our business. The outcome of any such Claims can be difficult to assess or quantify and may have a material adverse effect on our business, reputation, financial condition, results of operations and cash flows.
Environmental Plans and Regulations Risks
All phases of our operations are subject to environmental regulation, oversight and enforcement pursuant to a variety of federal, provincial, territorial, state, regional and municipal laws, and regulations in the jurisdictions in which we operate
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(collectively, the “environmental regulations”). Land management plans may be prepared in jurisdictions in which we operate, these may be legally binding and have the same effect as regulations. Environmental plans and regulations provide that exploration areas, wells, facility sites, pipelines, refineries and other properties and practices associated with our operations be constructed, operated, maintained, abandoned, reclaimed, and undertaken in accordance with the requirements set out therein. In addition, certain types of operations, including exploration and development projects and changes to certain existing projects, may require the submission and approval of environmental impact assessments or permit applications. Land management plans may limit future resource access, and failure to comply with approved plans may result in litigation or government intervention. Third party NGOs and citizen activist groups can also directly influence environmental regulations in the jurisdictions in which we operate, including the U.S. and Canada. We anticipate that further changes in environmental legislation will occur, which may result in approval delays for critical licences and permits, stricter standards and enforcement, larger fines and liabilities, the introduction of emissions limits, increased compliance costs and increased costs for closure, controls on land and resource access, reclamation, and ecological restoration. The complexities of changes in environmental regulations make it difficult to predict the potential future impact to our business.
Compliance with environmental plans and regulations requires significant expenditures. Our future capital expenditures and operating expenses could continue to increase as a result of, among other things, developments in our business, operations, plans and objectives and changes to existing, or implementation of new, environmental regulations. Failure to comply with environmental regulations may result in, among other things, the imposition of fines, penalties, environmental protection orders, suspension of operations, legal or regulatory proceedings, and could adversely affect our reputation. The costs of complying with environmental plans and regulations and remedying noncompliance issues may have a material adverse effect on our business, financial condition, results of operations and cash flows. The implementation of new environmental regulations or changes in interpretation or the modification of existing environmental regulations affecting the crude oil, natural gas, NGL and refining industry generally could reduce demand for our products as well as shift hydrocarbon demand toward relatively lower-carbon sources and affect our long-term prospects.
U.S. environmental regulations and aggressive enforcement from regulators present challenges and risks to our U.S. operations. New emission standards, more stringent water quality standards, and regulation of emerging contaminants such as Per- and Polyfluoroalkyl Substances ("PFAS") can increase compliance costs, require capital projects, lengthen project implementation times, and have an adverse effect on our business, financial condition, results of operations and cash flows. U.S. regulators have proposed that certain PFAS be characterized as a regulatory defined hazardous waste, which could lead to additional cleanup liability at U.S. sites. See “Water Regulation” below.
Canadian Species at Risk Act
The Canadian federal Species at Risk Act and associated agreements, as well as provincial regulation regarding threatened or endangered species and their habitat, may limit the pace and the amount of development or activity in areas identified as critical habitat for species of concern, such as woodland caribou. Previous petitions and litigation against the federal government in relation to the obligations under the Species at Risk Act have raised issues associated with the protection of species at risk and their critical habitat, both federally and on a provincial level, and these petitions compelled governments to enter into binding conservation and recovery agreements. If plans and actions undertaken by the provinces are deemed insufficient to support caribou recovery, the federal legislation includes the ability to implement measures that would preclude further development or modification of existing operations. The extent and magnitude of any potential adverse impacts of legislation on project development and operations cannot be estimated, as uncertainty exists as to whether plans and actions undertaken by the provinces will be sufficient to support caribou recovery.
Canadian Federal Air Quality Management System
The Multi Sector Air Pollutants Regulations (“MSAPR”), issued under the Canadian Environmental Protection Act, 1999, seek to protect the environment and health of Canadians by setting mandatory, nationally consistent air pollutant emission standards. The MSAPR are aimed at equipment-specific Base-Level Industrial Emissions Requirements (“BLIERs”). Nitrogen oxide BLIERs from our non-utility boilers, heaters and stationary engines are regulated in accordance with specified performance standards. We anticipate that the MSAPR will result in adverse impacts to Cenovus including, but not limited to, capital investment required to retrofit existing equipment and increased operating costs.
Canadian Ambient Air Quality Standards (“CAAQS”) for nitrogen dioxide, sulphur dioxide, fine particulate matter and ozone were introduced as part of a national Air Quality Management System. Provinces may implement the CAAQS at the regional air zone level and air zone management actions may include more stringent emissions standards applicable to industrial sources from approval holders in regions where we operate that may result in adverse impacts including, but not limited to, capital investment related to retrofitting existing facilities and increased operating costs.
Review of Environmental and Regulatory Processes
Increased or evolving environmental assessment obligations imposed by various levels of governments in the jurisdictions in which we operate, seek development or explore may create risk of increased costs and project development delays. The
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regulatory frameworks within the jurisdictions where we operate are constantly evolving and may become more onerous or costly which may impede our ability to economically develop our resources. The extent and magnitude of any adverse impacts of changes to such regulatory frameworks on project development and operations cannot be estimated at this time.
Water Regulation
We utilize fresh water in certain operations, which is obtained in accordance with respective jurisdictions’ regulations, including through water licences. If water use fees increase, the terms of water licences change or there are restrictions in the amount of water available for our use, production could decline or operating expenses could increase, both of which may have a material adverse effect on our business and financial condition. There can be no assurance that the licences to withdraw water will not be rescinded or that additional conditions will not be added to licences. There is no assurance that if we require new licences or amendments to existing licences, that these licences or amendments will be granted, or granted on favourable terms. This may adversely affect our business, including the ability to operate our assets and execute development plans.
Our U.S. refineries are subject to water discharge requirements that necessitate treatment of wastewater prior to discharging. Permits for discharging water are renewed from time to time to incorporate new water quality standards and may require modifications and expansion of water treatment facilities at the sites. Pollutants such as selenium, total dissolved solids, arsenic, mercury, and others may require advanced wastewater treatment, and discharge levels will depend on the types of crude processed at our refineries. Non-compliance with permit limits can lead to enforcement actions by regulators including issuance of fines, orders to upgrade treatment plants, and suspension of operations. Federal and state regulators in the U.S. are currently addressing the emerging pollutant PFAS in water discharge permits by requiring installation of additional wastewater treatment units and requiring monitoring of PFAS in discharges.
Hydraulic Fracturing
Legislative and regulatory initiatives have been introduced related to stakeholder claims that hydraulic fracturing techniques are harmful to surface water and drinking water sources, and are increasing the frequency of seismic activity. New laws, regulations or permitting requirements regarding hydraulic fracturing may lead to limitations or restrictions to oil and gas development activities, operational delays, increased compliance costs, restrictions to freshwater usage, additional operating requirements or increased third-party or governmental claims, resulting in increased cost of doing business as well as impacting the amount of natural gas and oil that we are ultimately able to produce from our reserves.
Cenovus ESG Focus Areas, Targets and Ambitions
We have set ambitious, achievable targets for each of our five ESG focus areas, including reducing our absolute emissions, decreasing freshwater intensity, reclaiming more land, supporting Indigenous reconciliation and increasing the number of women in leadership positions. To achieve these goals and to respond to changing market demand, we may incur additional costs and invest in new technologies and innovation. It is possible that the benefits of these investments may be less than we expect, which may have an adverse effect on our business, financial condition and reputation.
Generally, our ESG targets and ambitions depend significantly on our ability to execute our current business strategy, which can be impacted by the numerous risks and uncertainties associated with our business and the industry in which we operate, as outlined in the Risk Management and Risk Factors section of this MD&A. Investors and stakeholders increasingly compare companies based on ESG-related performance, including climate-related performance. Failure to achieve our ESG targets and ambitions, or a perception among key stakeholders that our ESG targets and ambitions are insufficient or unattainable, could adversely affect our reputation and our ability to attract capital and insurance coverage.
There is also a risk that some or all of the expected benefits and opportunities of achieving the various ESG targets and ambitions may fail to materialize, may cost more to achieve than we expect or may not occur within the anticipated time periods. In addition, there is a risk that the actions we take in implementing targets and ambitions relating to our ESG focus areas may, among other things, increase our capital expenditures and thereby impair our ability to invest in other aspects of our business, which could have a negative impact on our future operating and financial results.
Climate and GHG Emissions Reduction Goals
Our ability to meet our GHG emissions reduction goals is subject to numerous risks and uncertainties and our actions taken in implementing such goals may also expose us to certain additional and/or heightened financial and operational risks. Furthermore, our long-term ambition of reaching net zero emissions by 2050 is inherently less certain due to the longer timeframe and certain factors outside of our control, including the commercial application of future technologies that may be necessary for us to achieve this long-term ambition, and the cooperation and actions of third parties, including Pathways Alliance. The Pathways Alliance’s proposed CCS project is of particular importance, and if this project is delayed or does not proceed, Cenovus’s ability to achieve its GHG reduction goals and ambitions will be delayed and may not be achieved.
A reduction in GHG emissions relies on, among other things, our ability to develop, access and implement commercially viable and scalable emission reduction strategies and related technology and products. There are risks associated with relying largely or partly on new technologies, the incorporation of such technologies into new or existing operations and acceptance of new
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technologies in the market. If we are unable to effectively deploy the necessary technology, or such strategies or technologies do not perform as expected, we may be unable to meet our GHG emissions reduction goals on the planned timelines, or at all. In addition, there are other operational risks that may hinder our ability to successfully meet our GHG emissions reduction goals, including: unexpected impediments to, or effects of, the implementation of methane abatement and electrification initiatives in our Conventional and Conventional Heavy Oil segments; the purchase of renewable electricity; the unavailability of, or limited benefits from, technology that is expected to be commercially viable in the near term and its associated future benefits, including SAGD enhancement technologies, such as solvent-aided process and solvent-driven process technologies, carbon capture, utilization and storage technology and downhole technology improvements; a failure to capture the anticipated benefits of continued technological development; and industry collaboration and innovation to find solutions to reduce costs and GHG emissions. If we are unable to implement these strategies and technologies as planned without negatively impacting our expected operations or cost structure, or such strategies or technologies do not perform as expected, we may be unable to meet our GHG emissions reduction goals on the planned timelines, or at all.
In addition, achieving our GHG emissions reduction goals relies on the existence of a favorable and stable regulatory framework that includes, among other things, support from various levels of government, including financial support and shared capital cost commitments, which may not develop in a manner consistent with our expectations, or at all. Achieving our 2035 GHG emissions reduction goals will also require capital expenditures and Company resources, with the potential that actual costs may differ from our original estimates and the differences may be material. Furthermore, the cost of investing in emissions-reduction technologies, and the resulting change in the deployment of resources and focus, could have a negative impact on our business, financial condition, results of operations and cash flows.
Water Stewardship Targets
Our ability to meet our water stewardship targets will depend on the commercial viability and scalability of relevant water reduction strategies and related steam and water usage technology and products. There are risks associated with relying largely or partly on new technologies, the incorporation of such technologies into new or existing operations and acceptance of new technologies in the market. In the event we are unable to effectively deploy the necessary technologies, or such strategies or technologies do not perform as expected, achieving our stated target of reducing our freshwater intensity could be interrupted, delayed or abandoned.
Biodiversity Targets
Our ability to meet our biodiversity targets is subject to various operational, environmental and regulatory risks, which could impose significant costs, restrictions, liabilities and obligations on us. See “Abandonment and Reclamation” above. In addition, an increase in operating costs, changes to market conditions and access to additional capital, if needed, could result in our inability to fund, and ultimately meet, our biodiversity targets on the current timelines, or at all.
Indigenous Reconciliation Targets
A failure or delay in: (i) achieving our Indigenous reconciliation targets; or (ii) continuing to advance Indigenous reconciliation initiatives once targets have been met, may adversely affect our relationship with neighboring Indigenous businesses and communities, and our reputation. If we are unable to maintain a positive relationship with Indigenous communities near our operations, our progress and ability to develop and operate projects in line with our current business and operational strategies may be adversely impacted.
Inclusion and Diversity Targets
A failure or delay in achieving our inclusion and diversity targets and our ability to maintain targets once met, could have a material adverse effect on our recruitment activities and reputation with our stakeholders.
Reputation Risk
We rely on our reputation to build and maintain positive relationships with investors and other stakeholders, to recruit and retain staff and to be a credible, trusted company. Any actions we take that influence public or key stakeholder opinions have the potential to impact our reputation, which may adversely affect our share price, development plans and ability to continue operations.
Development of fossil fuel-based energy, and in particular the Alberta oil sands, has received considerable attention on the subjects of environmental impact, climate change, GHG emissions and Indigenous reconciliation. Concerns about oil sands may, directly or indirectly, impair the profitability of our current oil sands projects and the viability of future oil sands projects, by creating significant regulatory, economic and operating uncertainty. Increased public opposition to, and stigmatization of, the oil and gas sector, and in particular the oil sands industry, could lead to constrained access to insurance, liquidity and capital and changes in demand for our products, which may adversely impact our business, financial condition or results of operations.
Shareholder activism has been increasing in the oil and gas industry, and investors may from time-to-time attempt to effect changes to our business, governance, or reporting practices with respect to climate change or otherwise, whether by
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shareholder proposals, public campaigns, proxy solicitations or otherwise. Such actions could adversely impact our business by distracting our Board, Management and employees from core business operations, requiring us to incur increased advisory fees and related costs, interfering with our ability to successfully execute on strategic transactions and plans and provoking perceived uncertainty about the future direction of our business. In the event such activist shareholders are successful, Cenovus may be required to incur costs and dedicate time to adopting new practices. Such perceived uncertainty may, in turn, make it more difficult to retain employees and could result in significant fluctuation in the market price of our securities.
Other Risks
Dilutive Effect
We are authorized to issue, among other classes of shares, an unlimited number of common shares for consideration and on terms and conditions as established by our Board without the approval of our shareholders in certain instances. Any future issuances of Cenovus common shares or other securities exercisable or convertible into, or exchangeable for, Cenovus common shares may result in dilution to present and prospective Cenovus shareholders. The issuance of additional Cenovus common shares upon exercise, from time to time, of securities convertible into Cenovus common shares, including equity awards granted to our directors and officers, will have a further dilutive effect on the ownership interest of shareholders of Cenovus. Such issuances will have a dilutive effect on Cenovus's earnings per share, which could adversely affect the market price of Cenovus common shares and may adversely impact the value of our shareholders' investments.
Risks Relating to Acquisitions and Dispositions
We have completed, and may complete in the future, one or more acquisitions or dispositions for various strategic reasons. We may not be able to complete these transactions on favorable terms, on a timely basis, or at all. The integration of acquired assets and operations may result in the disruption of business, and may divert Management’s focus and resources from other strategic opportunities and operational matters during the process, which may result in increased costs and adversely affect our ability to achieve the anticipated benefits of such acquisitions. Acquiring assets requires assessments of their characteristics which are inexact and inherently uncertain and, as such, the acquired assets may not produce or operate as expected, may not have the anticipated benefits or synergies and may be subject to increased costs and liabilities. Further, we may not be able to obtain or realize upon contractual indemnities from a seller for liabilities created prior to an acquisition.
Various factors could materially affect our ability to dispose of assets in the future and may also reduce the proceeds or value realized from such dispositions. We may also retain certain liabilities or agree to indemnification obligations in a sale transaction, which may be difficult to quantify at the time of the transaction and could ultimately be material. Should any of the risks associated with acquisitions or dispositions materialize, they could have an adverse effect on our business, financial condition or reputation.
Risks Related to Significant Shareholders of Cenovus
The sale into the market of Cenovus common shares held by significant shareholders of Cenovus, Hutchison Whampoa Europe Investments S.à r.l. ("Hutchison") and L.F. Investments S.à r.l. ("L.F. Investments"), or market perception regarding any intention of Hutchison or L.F. Investments to sell Cenovus common shares, could adversely affect market prices for our common shares. While Hutchison and L.F. Investments are each subject to certain voting covenants pursuant to the terms of a standstill agreement they each entered into with Cenovus, each of Hutchison and L.F. Investments may be able to impact certain matters requiring Cenovus shareholder approval.
Market for Cenovus Warrants
There can be no assurance that an active public market for Cenovus Warrants will be sustained. If such a market is sustained, the market price of the Cenovus Warrants may be adversely affected by similar factors as those impacting the market price of Cenovus common shares. In addition, the market price of Cenovus common shares will significantly affect the market price of Cenovus Warrants which may result in significant volatility in the market price of the Cenovus Warrants and may negatively impact the value of the Cenovus Warrants.
Tax Laws
Income tax laws and regulations and other laws and government incentive programs (such as Canadian Carbon Capture Utilization and Storage Investment Tax Credits) may in the future be changed or interpreted in a manner that adversely affects us, our financial results, our ability to achieve our GHG emissions reduction goals and our shareholders. Tax authorities having jurisdiction over Cenovus may disagree with the manner in which we calculate our tax liabilities such that its provision for income taxes may not be sufficient, or such authorities could change their administrative practices to Cenovus’s detriment or to the detriment of our shareholders. Further, as there are usually a number of tax matters under review, income taxes are subject to measurement uncertainty. In addition, all of our tax filings are subject to audit by tax authorities who may disagree with such filings in a manner that adversely affects Cenovus and our shareholders.
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The international tax environment continues to change as a result of tax policy initiatives and reforms under consideration related to the Base Erosion and Profit Shifting (“BEPS”) project of the OECD. Although the timing and methods of implementation vary, numerous countries including Canada have responded to the BEPS project by implementing, or proposing to implement, changes to tax laws and tax treaties at a rapid pace. These changes may increase our cost of tax compliance and affect our business, financial condition and results of operations in a manner that is difficult to quantify. We will continue to monitor and assess potential adverse impacts on our global tax situation as a result of the BEPS project.
Pandemic Risk
Pandemics, epidemics or outbreaks, including COVID-19, remain a risk for the Company, and the ultimate impact of a pandemic is highly uncertain and subject to change. A pandemic and the corresponding measures we take to protect the health and safety of our staff and the continuity of our business may result in new legal challenges and disputes, including, but not limited to, litigation involving contract parties or employees and class action claims. Actions taken by various levels of government and health authorities in the event of a pandemic, epidemic or outbreak may result in a reduction in the demand for, and prices of, commodities that are closely linked to our financial performance and may negatively impact our business, results of operations and financial condition.
Modern Slavery Act
On January 1, 2024, the Fighting Against Forced Labour and Child Labour in Supply Chains Act (“Modern Slavery Act”)came into force in Canada. The Modern Slavery Act obligates Cenovus to publish an annual modern slavery report detailing steps regarding the previous year’s efforts to mitigate the risk of forced labour used at any step in their supply chain, including production of goods in Canada or elsewhere or of goods imported into Canada. There is a risk that our supply chain may actually use or be alleged to have used forced labour or child labour, and there may be difficulty in gathering sufficient information from suppliers. Additional work is required to assess and understand this risk. Such measures may affect our operational efficiency, results of operations, financial condition, or reputation.
A discussion of additional risks, should they arise after the date of this MD&A, which may impact our business, prospects, financial condition, results of operations and cash flows, and in some cases our reputation, can be found in our subsequently filed MD&A, available on SEDAR+ at sedarplus.ca, on EDGAR at sec.gov and at cenovus.com.
| CRITICAL ACCOUNTING JUDGMENTS, ESTIMATION UNCERTAINTIES AND ACCOUNTING POLICIES |
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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 material accounting policies are reviewed annually by the Audit Committee of the Board. Further details on the basis of preparation and our material accounting policies can be found in the notes to the Consolidated Financial Statements.
Critical Judgments in Applying Accounting Policies
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 the Company’s Consolidated Financial Statements.
Joint Arrangements
The classification of a joint arrangement that is held in a separate vehicle as either a joint operation or a joint venture requires judgment.
Cenovus has a 50 percent interest in WRB Refining LP (“WRB”), a jointly controlled entity. The joint arrangement meets the definition of a joint operation under IFRS 11, “Joint Arrangements” (“IFRS 11”); therefore, the Company’s share of the assets, liabilities, revenues and expenses are recorded in the Consolidated Financial Statements.
Prior to February 28, 2023, Cenovus held a 50 percent interest in BP-Husky Refining LLC, which was jointly controlled with bp and met the definition of a joint operation under IFRS 11. As such, Cenovus recognized its share of the assets, liabilities, revenues and expenses in its consolidated results. Subsequent to February 28, 2023, Cenovus controls the Toledo Refinery through Ohio Refining Company LLC, as defined under IFRS 10, “Consolidated Financial Statements” (“IFRS 10”), and, accordingly, the Ohio Refining Company LLC was consolidated.
Prior to August 31, 2022, Cenovus held a 50 percent interest in SOSP, which was jointly controlled with BP Canada Energy Group ULC (“bp Canada”) and met the definition of a joint operation under IFRS 11. As such, Cenovus recognized its share of the assets, liabilities, revenues and expenses in its consolidated results. Subsequent to August 31, 2022, Cenovus controls SOSP, as defined under IFRS 10, and, accordingly, SOSP was consolidated.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 62 |
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In determining the classification of its joint arrangements under IFRS 11, the Company considered the following:
•The original intention of the joint arrangements was to form an integrated North American heavy oil business. Partnerships are “flow-through” entities.
•The agreements require the partners to make contributions if funds are insufficient to meet the obligations or liabilities of the corporation and partnerships. The past development of Toledo and SOSP, and the past and future development of WRB, is dependent on funding from the partners by way of capital contribution commitments, notes payable and loans.
•WRB has third-party debt facilities to cover short-term working capital requirements. SOSP had a third-party debt facility.
•Phillips 66, as operator of WRB, either directly or through wholly-owned subsidiaries, provides marketing services, purchases necessary feedstock, and arranges for transportation and storage, on the partners' behalf as the agreements prohibit the partners from undertaking these roles themselves. In addition, the joint arrangement does not have employees and, as such, is not capable of performing these roles.
•As the operator of Toledo until February 28, 2023, bp, either directly or through wholly-owned subsidiaries, purchased necessary feedstock, and arranged for transportation and storage, on the partners' behalf. SOSP was operated like most typical western Canadian working interest relationships where the operating partner takes product on behalf of the participants in accordance with the partnership agreement.
•In each arrangement, output is taken by the partners, indicating that the partners have the rights to the economic benefits of the assets and the obligation for funding the liabilities of the arrangements.
Exploration and Evaluation Assets
The application of the Company’s accounting policy for E&E expenditures requires judgment in determining whether it is likely that future economic benefit exists when activities have not reached a stage where technical feasibility and commercial viability can be reasonably determined. Factors such as drilling results, future capital programs, future operating expenses, as well as estimated reserves and resources are considered. In addition, Management uses judgment to determine when E&E assets are reclassified to PP&E. In making this determination, various factors are considered, including the existence of reserves, and whether the appropriate approvals have been received from regulatory bodies and the Company’s internal approval process.
Identification of Cash-Generating Units
CGUs are defined as the lowest level of integrated assets for which there are separately identifiable cash flows that are largely independent of cash flows from other assets or groups of assets. The classification of assets and allocation of corporate assets into CGUs requires significant judgment and interpretation. Factors considered in the classification include the integration between assets, shared infrastructures, the existence of common sales points, geography, geologic structure, and the manner in which Management monitors and makes decisions about its operations. The recoverability of the Company’s upstream, refining, crude-by-rail, railcars, storage tanks and corporate assets are assessed at the CGU level. As such, the determination of a CGU could have a significant impact on impairment losses and impairment reversals.
Assessment of Impairment Indicators or Impairment Reversals
PP&E, E&E assets and ROU assets are reviewed separately for indicators of impairment on a quarterly basis or when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Impairment losses recognized in prior periods, other than goodwill impairments, are assessed at each reporting date for any indicators that the impairment losses may no longer exist or may have decreased. The identification of indicators of impairment or reversal of impairment requires significant judgment.
Key Sources of Estimation Uncertainty
Critical accounting estimates are those estimates that require Management to make particularly subjective or complex judgments about matters that are inherently uncertain. Estimates and underlying assumptions are reviewed on an ongoing basis and any revisions to accounting estimates are recorded in the period in which the estimates are revised.
The evolving worldwide demand for energy and global advancement of alternative sources of energy that are not sourced from fossil fuels could change assumptions used to determine the recoverable amount of the Company’s PP&E and E&E assets and could affect the carrying value of those assets, may affect future development or viability of exploration prospects, may curtail the expected useful lives of oil and gas assets thereby accelerating depreciation charges and may accelerate decommissioning obligations increasing the present value of the associated provisions. The timing in which global energy markets transition from carbon-based sources to alternative energy is highly uncertain. Environmental considerations are built into estimates through the use of key assumptions used to estimate fair value including forward commodity prices, forward crack spreads and discount rates. The energy transition could impact the future prices of commodities. Pricing assumptions used in the determination of recoverable amounts incorporate market expectations and the evolving worldwide demand for energy.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 63 |
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Changes to assumptions could result in a material adjustment to the carrying amount of assets and liabilities within the next financial year. The following are the key assumptions about the future and other key sources of estimation at the end of the reporting period that, if changed, could result in a material adjustment to the carrying amount of assets and liabilities within the next financial year.
Crude Oil and Natural Gas Reserves
There are a number of inherent uncertainties associated with estimating crude oil and natural gas reserves. Reserves estimates are dependent upon variables including the expected future production volumes, future development and operating expenses, forward commodity prices, estimated royalty payments and taxes. Changes in these variables could significantly impact the reserves estimates which would affect the impairment test recoverable amount and DD&A expense of the Company’s crude oil and natural gas assets in the Oil Sands, Conventional and Offshore segments. The Company’s reserves are evaluated annually and reported to the Company by its IQREs.
Recoverable Amounts
Determining the recoverable amount of a CGU or an individual asset requires the use of estimates and assumptions, which are subject to change as new information becomes available. For the Company’s upstream assets, these estimates include quantity of reserves, expected production volumes, future development and operating expenses, forward commodity prices and discount rates. Recoverable amounts for the Company’s downstream assets use assumptions such as refined product production, forward crude oil prices, forward crack spreads, future operating expenses and capital expenditures and discount rates. Changes in assumptions used in determining the recoverable amount could affect the carrying value of the related assets.
Decommissioning Costs
Provisions are recorded for the future decommissioning and restoration of the Company’s upstream assets, refining assets and crude-by-rail terminal at the end of their economic lives. Management uses judgment to assess the existence of liabilities and estimate the future value. The actual cost of decommissioning and restoration is uncertain and cost estimates may change in response to numerous factors including changes in legal requirements, technological advances, inflation and the timing of expected decommissioning and restoration. In addition, Management determines the appropriate discount rate at the end of each reporting period. This discount rate, which is credit-adjusted, is used to determine the present value of the estimated future cash outflows required to settle the obligation and may change in response to numerous market factors.
Fair Value of Assets Acquired and Liabilities Assumed in a Business Combination
The fair value of assets acquired, liabilities assumed and assets given up in a business combination, including contingent consideration and goodwill, is estimated based on information available at the date of acquisition. Various valuation techniques are applied for measuring fair value including market comparable transactions and discounted cash flows. For the Company’s upstream assets, key assumptions in the discounted cash flow models used to estimate fair value include forward commodity prices, expected production volumes, quantity of reserves, discount rates, future development and operating expenses. Estimated production volumes and quantity of reserves for acquired oil and gas properties were developed by internal geology and engineering professionals and IQREs. For downstream assets, key assumptions used to estimate fair value include refined product production, forward crude oil prices, forward crack spreads, discount rates, operating expenses and future capital expenditures. Changes in these variables could significantly impact the carrying value of the net assets acquired.
Income Tax Provisions
The determination of the Company’s income and other tax liabilities requires interpretation of complex laws and regulations often involving multiple jurisdictions. There are usually a number of tax matters under review; therefore, income taxes are subject to measurement uncertainty.
Deferred income tax assets are recorded to the extent that it is probable that the deductible temporary differences will be recoverable in future periods. The recoverability assessment involves a significant amount of estimation including an evaluation of when the temporary differences will reverse, an analysis of the amount of future taxable earnings, the availability of cash flow to offset the tax assets when the reversal occurs and the application of tax laws. There are some transactions for which the ultimate tax determination is uncertain. To the extent that assumptions used in the recoverability assessment change, there may be a significant impact on the Consolidated Financial Statements of future periods.
New Accounting Standards and Interpretations Not Yet Adopted
There are new accounting standards, amendments to accounting standards and interpretations that are effective for annual periods beginning on or after January 1, 2024, and have not been applied in preparing the Consolidated Financial Statements for the year ended December 31, 2023. These standards and interpretations are not expected to have a material impact on the Company’s Consolidated Financial Statements or the Company's business.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 64 |
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| CONTROL ENVIRONMENT | |
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Management, including our President & Chief Executive Officer and Executive Vice-President & Chief Financial Officer, assessed the design and effectiveness of ICFR and disclosure controls and procedures (“DC&P”) as at December 31, 2023. 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 December 31, 2023.
The effectiveness of our ICFR was audited as at December 31, 2023 by PricewaterhouseCoopers LLP, an independent firm of Chartered Professional Accountants, as stated in their Report of Independent Registered Public Accounting Firm, which is included in our audited Consolidated Financial Statements for the year ended December 31, 2023.
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 are 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 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 “aim”, “anticipate”, “believe”, “capacity”, “commit”, “continue”, “could”, “estimate”, “expect”, “focus”, “forecast”, “may”, “objective”, “opportunities”, “plan”, “position”, “prioritize”, “progress”, “strive”, “target”, and “will”, or similar expressions and includes suggestions of future outcomes, including, but not limited to, statements about: shareholder value and returns; reducing operating, capital and general and administrative costs; realizing the full value of our integrated business; supporting long term value for Cenovus; safety performance; downstream reliability and profitability; cost leadership; advocating for our company and industry; executing major projects such as West White Rose, SeaRose ALE, Narrows Lake tie-back at Christina Lake, and Foster Creek Optimization on time and on budget; delivering first oil from the West White Rose project in 2026; being best in class operators; meeting targets for our five ESG focus areas; the Pathways Alliance foundational project; sustainability and sustainability leadership; maximizing long term profitability of our assets; our 2024 capital investment budget; returning incremental value to shareholders through share buybacks and/or variable dividends in accordance with the capital allocation framework; GHG emissions; infrastructure; operating and capital costs; capital investment, allocation, and structure; capital discipline; Free Funds Flow generation; resiliency; Excess Free Funds Flow allocation; flexibility in both high and low commodity price environments; funding near-term cash requirements; managing capital structure; dividends of any kind; share repurchases under the NCIB; deleveraging; meeting payment obligations; maintaining credit ratings; debt levels; Net Debt; Net Debt to Adjusted Funds Flow Ratio; Net Debt to Adjusted EBITDA Ratio; maintaining liquidity; production and production rates; crude throughput; consistent and reliable operations at all operated assets; operating performance; liabilities from legal proceedings; cash flow; price alignment and volatility management strategies; financial results; variable payments; provision for income taxes; capturing value; mitigating the impact of crude oil and refined product differentials; integrating the Toledo and Lima refineries; optimizing run rates at the Company’s refineries achieving full operation of the Superior Refinery; transportation and storage commitments; and the Company’s outlook for commodities and the Canadian dollar and the influences and effects 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 bitumen, crude 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 acquisitions; the accuracy of any assessments undertaken in connection with acquisitions; forecast production and crude
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throughput volumes and timing thereof; 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 bitumen, 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 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 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; 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 Canada; market and business conditions; forecast inflation and other assumptions inherent in the Company’s 2024 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.
2024 guidance dated December 13, 2023, and available on cenovus.com, assumes: Brent prices of US$79.00 per barrel, WTI prices of US$75.00 per barrel; WCS of US$58.00 per barrel; Differential WTI-WCS of US$17.00 per barrel; AECO natural gas prices of $2.80 per Mcf; Chicago 3-2-1 crack spread of US$21.00 per barrel; and an exchange rate of $0.73 US$/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 Company’s ability to realize the anticipated benefits of acquisitions in a timely manner or at all; unforeseen or underestimated liabilities associated with 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 being 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 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 Canada; 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
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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 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 Refining processes; the occurrence of unexpected events resulting in operational interruptions, including at facilities operated by our partners or third parties, such as blowouts, fires, explosions, railcar incidents or derailments, aviation incidents, iceberg collisions, 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, adverse sea conditions, extreme weather events, natural disasters, acts of activism, 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 Refining 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 and diverse 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 most recently filed Annual 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 sedarplus.ca, 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 and definitions are used in this document:
| Crude Oil and NGLs | Natural Gas | Other | |||
|---|---|---|---|---|---|
| bbl | barrel | Mcf | thousand cubic feet | BOE | barrel of oil equivalent |
| Mbbls/d | thousand barrels per day | MMcf | million cubic feet | MBOE | thousand barrels of oil<br> equivalent |
| WCS | Western Canadian Select | MMcf/d | million cubic feet per day | MBOE/d | thousand barrels of oil <br> equivalent per day |
| WTI | West Texas Intermediate | Bcf | billion cubic feet | MMBOE | million barrels of oil equivalent |
| CO2e | carbon dioxide equivalent | ||||
| DD&A | depreciation, depletion and<br> amortization | ||||
| GHG | greenhouse gas | ||||
| NCIB | normal course issuer bid | ||||
| AECO | Alberta Energy Company | ||||
| NYMEX | New York Mercantile Exchange | ||||
| OPEC | Organization of Petroleum<br> Exporting Countries | ||||
| OPEC+ | OPEC and a group of 11 <br> non-OPEC members | ||||
| SAGD | steam-assisted gravity drainage | ||||
| USGC | U.S. Gulf Coast |
Scope 1 emissions are direct GHG emissions from owned or operated facilities by the reporting company. This includes emissions from fuel combustion, venting, flaring, industrial processes and fugitive leaks from equipment.
Scope 2 emissions are indirect GHG emissions associated with the purchase or acquisition of electricity, steam, heat or cooling for use at the owned or operated facility.
Cenovus accounts for emissions on a gross operatorship basis. The Company also reports its net-equity share of emissions from all of its assets.
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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, Adjusted Funds Flow, Adjusted Funds Flow Per Share – Basic, Adjusted Funds Flow Per Share – Diluted, Free Funds Flow, Excess Free Funds Flow, Gross Margin, Refining Margin, Unit Operating Expense, Per Unit DD&A and Netbacks (including the total netbacks per BOE).
These measures may not be comparable to similar measures presented by other issuers. These measures are 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. Refer to the Specified Financial Measures Advisory of our 2022 annual MD&A for reconciliations of Operating Margin, Adjusted Funds Flow, Free Funds Flow, Excess Free Funds Flow for quarters in 2022 and 2021 not found below.
Operating Margin
Operating Margin and Operating Margin by asset are non-GAAP financial measures, and Operating Margin for Upstream or Downstream operations 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 expenses, 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.
| 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ millions) | Upstream (1) | Downstream (1) | Total | ||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Gross Sales (2) | 31,082 | 41,142 | 27,925 | 32,626 | 38,010 | 26,258 | 63,708 | 79,152 | 54,183 | ||||||||||||||
| Less: Royalties | 3,270 | 4,868 | 2,454 | — | — | — | 3,270 | 4,868 | 2,454 | ||||||||||||||
| 27,812 | 36,274 | 25,471 | 32,626 | 38,010 | 26,258 | 60,438 | 74,284 | 51,729 | |||||||||||||||
| Expenses | |||||||||||||||||||||||
| Purchased Product (2) | 3,152 | 6,741 | 4,059 | 28,273 | 32,409 | 23,111 | 31,425 | 39,150 | 27,170 | ||||||||||||||
| Transportation and Blending (2) | 11,088 | 12,301 | 8,795 | — | — | — | 11,088 | 12,301 | 8,795 | ||||||||||||||
| Operating | 3,690 | 3,789 | 3,241 | 3,201 | 3,050 | 2,258 | 6,891 | 6,839 | 5,499 | ||||||||||||||
| Realized (Gain) Loss on Risk Management | 12 | 1,619 | 788 | — | 112 | 104 | 12 | 1,731 | 892 | ||||||||||||||
| Operating Margin | 9,870 | 11,824 | 8,588 | 1,152 | 2,439 | 785 | 11,022 | 14,263 | 9,373 | 2023 | |||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||
| Upstream (1) | Downstream (1) | Total | |||||||||||||||||||||
| ($ millions) | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||||
| Revenues | |||||||||||||||||||||||
| Gross Sales (2) | 7,797 | 8,783 | 7,285 | 7,217 | 8,404 | 9,658 | 7,427 | 7,137 | 16,201 | 18,441 | 14,712 | 14,354 | |||||||||||
| Less: Royalties | 902 | 1,135 | 637 | 596 | — | — | — | — | 902 | 1,135 | 637 | 596 | |||||||||||
| 6,895 | 7,648 | 6,648 | 6,621 | 8,404 | 9,658 | 7,427 | 7,137 | 15,299 | 17,306 | 14,075 | 13,758 | ||||||||||||
| Expenses | |||||||||||||||||||||||
| Purchased Product (2) | 663 | 900 | 751 | 838 | 7,888 | 7,947 | 6,447 | 5,991 | 8,551 | 8,847 | 7,198 | 6,829 | |||||||||||
| Transportation and Blending (2) | 2,894 | 2,397 | 2,770 | 3,027 | — | — | — | — | 2,894 | 2,397 | 2,770 | 3,027 | |||||||||||
| Operating | 864 | 914 | 883 | 1,029 | 826 | 778 | 843 | 754 | 1,690 | 1,692 | 1,726 | 1,783 | |||||||||||
| Realized (Gain) Loss on Risk Management | 19 | (10) | (13) | 16 | (6) | 11 | (6) | 1 | 13 | 1 | (19) | 17 | |||||||||||
| Operating Margin | 2,455 | 3,447 | 2,257 | 1,711 | (304) | 922 | 143 | 391 | 2,151 | 4,369 | 2,400 | 2,102 |
(1)Found in Note 1 of the Consolidated Financial Statements.
(2)Comparative periods prior to the third quarter of 2023 reflect certain revisions. See Note 39 of the Consolidated Financial Statements and Prior Period Revisions found in the Advisory section of this MD&A for further details.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 69 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Upstream (1) | Downstream (1) | Total | ||||||||||
| ($ millions) | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 |
| Revenues | ||||||||||||
| Gross Sales (2) | 8,251 | 10,250 | 11,719 | 10,922 | 8,302 | 10,873 | 10,719 | 8,116 | 16,553 | 21,123 | 22,438 | 19,038 |
| Less: Royalties | 875 | 1,226 | 1,582 | 1,185 | — | — | — | — | 875 | 1,226 | 1,582 | 1,185 |
| 7,376 | 9,024 | 10,137 | 9,737 | 8,302 | 10,873 | 10,719 | 8,116 | 15,678 | 19,897 | 20,856 | 17,853 | |
| Expenses | ||||||||||||
| Purchased Product (2) | 1,079 | 2,383 | 1,461 | 1,818 | 6,993 | 9,680 | 8,919 | 6,817 | 8,072 | 12,063 | 10,380 | 8,635 |
| Transportation and Blending (2) | 2,984 | 2,826 | 3,272 | 3,219 | — | — | — | — | 2,984 | 2,826 | 3,272 | 3,219 |
| Operating | 955 | 915 | 1,010 | 909 | 759 | 780 | 866 | 645 | 1,714 | 1,695 | 1,876 | 1,554 |
| Realized (Gain) Loss on Risk Management | 134 | 51 | 563 | 871 | (8) | (77) | 87 | 110 | 126 | (26) | 650 | 981 |
| Operating Margin | 2,224 | 2,849 | 3,831 | 2,920 | 558 | 490 | 847 | 544 | 2,782 | 3,339 | 4,678 | 3,464 |
(1)Found in Note 1 of the Consolidated Financial Statements.
(2)Comparative periods prior to the third quarter of 2023 reflect certain revisions. See Note 39 of the Consolidated Financial Statements and Prior Period Revisions found in the Advisory section of this MD&A for further details.
Operating Margin by Asset
| ( millions) | Atlantic | Asia Pacific | Offshore (1) |
| Revenues | |||
| Gross Sales | 400 | 1,217 | 1,617 |
| Less: Royalties | 15 | 84 | 99 |
| 385 | 1,133 | 1,518 | |
| Expenses | |||
| Transportation and Blending | 16 | — | 16 |
| Operating | 262 | 122 | 384 |
| Operating Margin | 107 | 1,011 | 1,118 |
All values are in US Dollars.
(1)Found in Note 1 of the Consolidated Financial Statements.
| ( millions) | Atlantic | Asia Pacific | Offshore (1) |
| Revenues | |||
| Gross Sales | 578 | 1,442 | 2,020 |
| Less: Royalties | (3) | 80 | 77 |
| 581 | 1,362 | 1,943 | |
| Expenses | |||
| Transportation and Blending | 15 | — | 15 |
| Operating | 204 | 114 | 318 |
| Operating Margin | 362 | 1,248 | 1,610 |
All values are in US Dollars.
(1)Found in Note 1 of the Consolidated Financial Statements.
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, in total and on a per-share basis. 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, income tax receivable, inventories (excluding non-cash inventory write-downs and reversals), accounts payable and accrued liabilities and income tax payable. Adjusted Funds Flow Per Share – Basic is defined as Adjusted Funds Flow divided by the basic weighted average number of shares. Adjusted Funds Flow Per Share – Diluted is defined as Adjusted Funds Flow divided by the diluted weighted average number of shares.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 70 |
|---|
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.
| Three Months Ended December 31, | Year Ended December 31, | ||||
|---|---|---|---|---|---|
| ($ millions) | 2023 | 2022 | 2023 | 2022 | |
| Cash From (Used in) Operating Activities | 2,946 | 2,970 | 7,388 | 11,403 | |
| (Add) Deduct: | |||||
| Settlement of Decommissioning Liabilities | (65) | (49) | (222) | (150) | |
| Net Change in Non-Cash Working Capital | 949 | 673 | (1,193) | 575 | |
| Adjusted Funds Flow | 2,062 | 2,346 | 8,803 | 10,978 | |
| Capital Investment | 1,170 | 1,274 | 4,298 | 3,708 | |
| Free Funds Flow | 892 | 1,072 | 4,505 | 7,270 | |
| Add (Deduct): | |||||
| Base Dividends Paid on Common Shares | (261) | (201) | |||
| Dividends Paid on Preferred Shares | (9) | — | |||
| Settlement of Decommissioning Liabilities | (65) | (49) | |||
| Principal Repayment of Leases | (72) | (74) | |||
| Acquisitions, Net of Cash Acquired | (14) | (7) | |||
| Proceeds From Divestitures | — | 45 | |||
| Payment on Divestiture of Assets | — | — | |||
| Excess Free Funds Flow | 471 | 786 |
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 unit 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 from our refineries and upgrader divided by barrels of crude oil unit throughput.
Canadian Refining
| Three Months Ended December 31, 2023 | |||||
|---|---|---|---|---|---|
| Basis of Refining Margin Calculation | |||||
| ($ millions) | Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | Other (1) | Total Canadian<br><br>Refining (2) |
| Revenues | 1,191 | 263 | 1,454 | 103 | 1,557 |
| Purchased Product | 964 | 233 | 1,197 | 66 | 1,263 |
| Gross Margin | 227 | 30 | 257 | 37 | 294 |
| Operating Statistics | |||||
| Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | |||
| Heavy Crude Oil Unit Throughput (Mbbls/d) | 73.6 | 26.7 | 100.3 | ||
| Refining Margin ($/bbl) | 33.48 | 11.96 | 27.74 |
(1)Includes ethanol operations and crude-by-rail operations.
(2)These amounts, excluding gross margin, are found in Note 1 of the interim Consolidated Financial Statements.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 71 | ||||
|---|---|---|---|---|---|
| Three Months Ended December 31, 2022 | |||||
| --- | --- | --- | --- | --- | --- |
| Basis of Refining Margin Calculation | |||||
| ($ millions) | Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster<br><br>Refinery Total | Other (1) | Total Canadian<br><br>Refining (2) |
| Revenues | 905 | 240 | 1,145 | 627 | 1,772 |
| Purchased Product | 574 | 170 | 744 | 580 | 1,324 |
| Gross Margin | 331 | 70 | 401 | 47 | 448 |
| Operating Statistics | |||||
| Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | |||
| Heavy Crude Oil Unit Throughput<br><br>(Mbbls/d) | 68.4 | 25.9 | 94.3 | ||
| Refining Margin ($/bbl) | 52.60 | 29.36 | 46.21 |
(1)Includes ethanol operations, crude-by-rail operations, and the retail and commercial fuels business.
(2)These amounts, excluding gross margin, are found in Note 1 of the interim Consolidated Financial Statements.
| Year Ended December 31, 2023 | |||||
|---|---|---|---|---|---|
| Basis of Refining Margin Calculation | |||||
| ($ millions) | Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | Other (1) | Total Canadian<br><br>Refining (2) |
| Revenues | 4,810 | 1,002 | 5,812 | 421 | 6,233 |
| Purchased Product | 3,890 | 744 | 4,634 | 285 | 4,919 |
| Gross Margin | 920 | 258 | 1,178 | 136 | 1,314 |
| Operating Statistics | |||||
| Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | |||
| Heavy Crude Oil Unit Throughput (Mbbls/d) | 73.1 | 27.6 | 100.7 | ||
| Refining Margin ($/bbl) | 34.48 | 25.58 | 32.04 |
(1)Includes ethanol operations and crude-by-rail operations.
(2)These amounts, excluding gross margin, are found in Note 1 of the interim Consolidated Financial Statements.
| Year Ended December 31, 2022 | |||||
|---|---|---|---|---|---|
| Basis of Refining Margin Calculation | |||||
| ($ millions) | Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster<br><br>Refinery Total | Other (1) | Total Canadian Refining (2) |
| Revenues | 3,822 | 1,056 | 4,878 | 2,914 | 7,792 |
| Purchased Product | 2,918 | 809 | 3,727 | 2,662 | 6,389 |
| Gross Margin | 904 | 247 | 1,151 | 252 | 1,403 |
| Operating Statistics | |||||
| Lloydminster Upgrader | Lloydminster Refinery | Lloydminster Upgrader and Lloydminster Refinery Total | |||
| Heavy Crude Oil Unit Throughput<br><br>(Mbbls/d) | 68.7 | 24.2 | 92.9 | ||
| Refining Margin ($/bbl) | 36.04 | 27.91 | 33.92 |
(1)Includes ethanol operations, crude-by-rail operations, and the retail and commercial fuels business.
(2)These amounts, excluding gross margin, are found in Note 1 of the interim Consolidated Financial Statements.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 72 |
|---|
U.S. Refining
| Three Months Ended | |||||
|---|---|---|---|---|---|
| 2023 | 2022 | ||||
| ($ millions) | Q4 | Q3 | Q2 | Q1 | Q4 |
| Revenues (1) (2) | 6,847 | 7,853 | 6,064 | 5,629 | 6,530 |
| Purchased Product (1) (2) | 6,625 | 6,467 | 5,364 | 4,898 | 5,669 |
| Gross Margin | 222 | 1,386 | 700 | 731 | 861 |
| Crude Oil Unit Throughput (Mbbls/d) | 478.8 | 555.9 | 442.5 | 359.2 | 379.0 |
| Refining Margin ($/bbl) | 5.03 | 27.10 | 17.40 | 22.62 | 24.70 |
| --- | --- | ||||
| ( millions) | 2023 | 2022 | |||
| Revenues (1) (2) | 26,393 | 30,218 | |||
| Purchased Product (1) (2) | 23,354 | 26,020 | |||
| Gross Margin | 3,039 | 4,198 | |||
| Crude Oil Unit Throughput (Mbbls/d) | 459.7 | 400.8 | |||
| Refining Margin (/bbl) | 18.12 | 28.70 |
All values are in US Dollars.
(1)Found in Note 1 of the interim Consolidated Financial Statements.
(2)Comparative periods prior to the third quarter of 2023 reflect certain revisions. See Note 39 of the Consolidated Financial Statements and Prior Period Revisions found in the Advisory section of this MD&A for further details.
Per Unit DD&A
Per Unit DD&A is a specified financial measure used to measure DD&A on a per-unit basis in our upstream segments. We define Per Unit DD&A as the sum of upstream depletion on producing crude oil and natural gas properties and the associated asset retirement costs divided by sales volumes.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 73 |
|---|
Netback Reconciliations
Netback per BOE is a non-GAAP ratio. Netback is a non-GAAP financial measure commonly used in the oil and gas industry to assist in measuring operating performance. 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, and exclude risk management activities. The sales price, transportation and blending expense, 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.
Oil Sands
| Basis of Netback Calculation | |||||||
|---|---|---|---|---|---|---|---|
| Three Months Ended December 31, 2023 ($ millions) | Foster Creek | Christina Lake | Sunrise | Other Oil Sands (1) | Total Bitumen and Heavy Oil | Natural Gas | Total Oil Sands |
| Gross Sales | 1,312 | 1,447 | 357 | 778 | 3,894 | 2 | 3,896 |
| Royalties | 353 | 366 | 32 | 86 | 837 | 1 | 838 |
| Purchased Product | — | — | — | — | — | — | — |
| Transportation and Blending | 200 | 161 | 58 | 39 | 458 | — | 458 |
| Operating | 174 | 167 | 65 | 203 | 609 | 1 | 610 |
| Netback | 585 | 753 | 202 | 450 | 1,990 | — | 1,990 |
| Realized (Gain) Loss on Risk Management | 24 | ||||||
| Operating Margin | 1,966 | ||||||
| Basis of Netback Calculation | Adjustments | ||||||
| --- | --- | --- | --- | --- | --- | --- | |
| Three Months Ended December 31, 2023 ($ millions) | Total Oil Sands | Condensate | Third-party Sourced | Other (2) | Total Oil Sands (3) | ||
| Gross Sales | 3,896 | 2,329 | 156 | 96 | 6,477 | ||
| Royalties | 838 | — | — | 3 | 841 | ||
| Purchased Product | — | — | 156 | 70 | 226 | ||
| Transportation and Blending | 458 | 2,329 | — | 22 | 2,809 | ||
| Operating | 610 | — | — | 5 | 615 | ||
| Netback | 1,990 | — | — | (4) | 1,986 | ||
| Realized (Gain) Loss on Risk Management | 24 | — | — | — | 24 | ||
| Operating Margin | 1,966 | — | — | (4) | 1,962 | ||
| Basis of Netback Calculation | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- |
| Three Months Ended December 31, 2022 ($ millions) | Foster Creek | Christina Lake | Sunrise | Other Oil Sands (1) | Total Bitumen and Heavy Oil | Natural Gas | Total Oil Sands |
| Gross Sales | 1,282 | 1,453 | 222 | 745 | 3,702 | 4 | 3,706 |
| Royalties | 338 | 344 | 13 | 88 | 783 | 1 | 784 |
| Purchased Product | — | — | — | — | — | — | — |
| Transportation and Blending | 255 | 157 | 42 | 39 | 493 | — | 493 |
| Operating | 194 | 221 | 60 | 257 | 732 | 3 | 735 |
| Netback | 495 | 731 | 107 | 361 | 1,694 | — | 1,694 |
| Realized (Gain) Loss on Risk Management | 59 | ||||||
| Operating Margin | 1,635 | ||||||
| Basis of Netback Calculation | Adjustments | ||||||
| --- | --- | --- | --- | --- | --- | ||
| Three Months Ended December 31, 2022 ($ millions) | Total Oil Sands | Condensate | Third-party Sourced (4) | Other (2) | Total Oil Sands (3) (4) | ||
| Gross Sales | 3,706 | 2,415 | 422 | 110 | 6,653 | ||
| Royalties | 784 | — | — | — | 784 | ||
| Purchased Product | — | — | 422 | 94 | 516 | ||
| Transportation and Blending | 493 | 2,415 | — | 14 | 2,922 | ||
| Operating | 735 | — | — | (2) | 733 | ||
| Netback | 1,694 | — | — | 4 | 1,698 | ||
| Realized (Gain) Loss on Risk Management | 59 | — | — | — | 59 | ||
| Operating Margin | 1,635 | — | — | 4 | 1,639 |
(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)Comparative periods prior to the third quarter of 2023 reflect certain revisions. See Note 39 of the Consolidated Financial Statements and Prior Period Revisions found in the Advisory section of this MD&A for further details.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 74 | ||||||
|---|---|---|---|---|---|---|---|
| Basis of Netback Calculation | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- |
| Year Ended December 31, 2023 ($ millions) | Foster Creek | Christina Lake | Sunrise | Other Oil Sands (1) | Total Bitumen and Heavy Oil | Natural Gas | Total Oil Sands |
| Gross Sales | 5,347 | 5,848 | 1,298 | 3,208 | 15,701 | 8 | 15,709 |
| Royalties | 1,136 | 1,556 | 74 | 285 | 3,051 | 5 | 3,056 |
| Purchased Product | — | — | — | — | — | — | — |
| Transportation and Blending | 819 | 572 | 215 | 153 | 1,759 | — | 1,759 |
| Operating | 782 | 729 | 294 | 884 | 2,689 | 9 | 2,698 |
| Netback | 2,610 | 2,991 | 715 | 1,886 | 8,202 | (6) | 8,196 |
| Realized (Gain) Loss on Risk Management | 17 | ||||||
| Operating Margin | 8,179 | ||||||
| Basis of Netback Calculation | Adjustments | ||||||
| --- | --- | --- | --- | --- | --- | --- | |
| Year Ended December 31, 2023 ($ millions) | Total Oil Sands | Condensate | Third-party Sourced | Other (2) | Total Oil Sands (3) | ||
| Gross Sales | 15,709 | 8,907 | 1,199 | 377 | 26,192 | ||
| Royalties | 3,056 | — | — | 3 | 3,059 | ||
| Purchased Product | — | — | 1,199 | 258 | 1,457 | ||
| Transportation and Blending | 1,759 | 8,907 | — | 108 | 10,774 | ||
| Operating | 2,698 | — | — | 18 | 2,716 | ||
| Netback | 8,196 | — | — | (10) | 8,186 | ||
| Realized (Gain) Loss on Risk Management | 17 | — | — | — | 17 | ||
| Operating Margin | 8,179 | — | — | (10) | 8,169 | ||
| Basis of Netback Calculation | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- |
| Year Ended December 31, 2022 ($ millions) | Foster Creek | Christina Lake | Sunrise | Other Oil Sands (1) | Total Bitumen and Heavy Oil | Natural Gas | Total Oil Sands |
| Gross Sales | 6,723 | 7,951 | 950 | 3,967 | 19,591 | 18 | 19,609 |
| Royalties | 1,783 | 2,244 | 59 | 390 | 4,476 | 6 | 4,482 |
| Purchased Product | — | — | — | — | — | — | — |
| Transportation and Blending | 814 | 588 | 135 | 149 | 1,686 | — | 1,686 |
| Operating | 870 | 898 | 193 | 960 | 2,921 | 20 | 2,941 |
| Netback | 3,256 | 4,221 | 563 | 2,468 | 10,508 | (8) | 10,500 |
| Realized (Gain) Loss on Risk Management | 1,527 | ||||||
| Operating Margin | 8,973 | ||||||
| Basis of Netback Calculation | Adjustments | ||||||
| --- | --- | --- | --- | --- | --- | ||
| Year Ended December 31, 2022 ($ millions) | Total Oil Sands | Condensate | Third-party Sourced (4) | Other (2) | Total Oil Sands (3) (4) | ||
| Gross Sales | 19,609 | 10,307 | 4,409 | 358 | 34,683 | ||
| Royalties | 4,482 | — | — | 11 | 4,493 | ||
| Purchased Product | — | — | 4,409 | 309 | 4,718 | ||
| Transportation and Blending | 1,686 | 10,307 | — | 43 | 12,036 | ||
| Operating | 2,941 | — | — | (11) | 2,930 | ||
| Netback | 10,500 | — | — | 6 | 10,506 | ||
| Realized (Gain) Loss on Risk Management | 1,527 | — | — | — | 1,527 | ||
| Operating Margin | 8,973 | — | — | 6 | 8,979 |
(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)Comparative periods prior to the third quarter of 2023 reflect certain revisions. See Note 39 of the Consolidated Financial Statements and Prior Period Revisions found in the Advisory section of this MD&A for further details.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 75 |
|---|
Conventional
| Basis of Netback Calculation | Adjustments | |||
|---|---|---|---|---|
| Three Months Ended December 31, 2023 ($ millions) | Conventional | Third-party Sourced | Other (1) | Conventional (2) |
| Gross Sales | 331 | 437 | 38 | 806 |
| Royalties | 27 | — | — | 27 |
| Purchased Product | — | 437 | — | 437 |
| Transportation and Blending | 54 | — | 24 | 78 |
| Operating | 141 | — | 5 | 146 |
| Netback | 109 | — | 9 | 118 |
| Realized (Gain) Loss on Risk Management | (5) | — | — | (5) |
| Operating Margin | 114 | — | 9 | 123 |
| Basis of Netback Calculation | Adjustments | |||
| --- | --- | --- | --- | --- |
| Three Months Ended December 31, 2022 ($ millions) | Conventional | Third-party Sourced (3) | Other (1) | Conventional (2) (3) |
| Gross Sales | 555 | 563 | 35 | 1,153 |
| Royalties | 69 | — | 1 | 70 |
| Purchased Product | — | 563 | — | 563 |
| Transportation and Blending | 47 | — | 12 | 59 |
| Operating | 135 | — | 3 | 138 |
| Netback | 304 | — | 19 | 323 |
| Realized (Gain) Loss on Risk Management | 75 | — | — | 75 |
| Operating Margin | 229 | — | 19 | 248 |
| Basis of Netback Calculation | Adjustments | |||
| --- | --- | --- | --- | --- |
| Year Ended December 31, 2023 ($ millions) | Conventional | Third-party Sourced | Other (1) | Conventional (2) |
| Gross Sales | 1,390 | 1,695 | 188 | 3,273 |
| Royalties | 112 | — | — | 112 |
| Purchased Product | — | 1,695 | — | 1,695 |
| Transportation and Blending | 182 | — | 116 | 298 |
| Operating | 570 | — | 20 | 590 |
| Netback | 526 | — | 52 | 578 |
| Realized (Gain) Loss on Risk Management | (5) | — | — | (5) |
| Operating Margin | 531 | — | 52 | 583 |
| Basis of Netback Calculation | Adjustments | |||
| --- | --- | --- | --- | --- |
| Year Ended December 31, 2022 ($ millions) | Conventional | Third-party Sourced (3) | Other (1) | Conventional (2) (3) |
| Gross Sales | 2,238 | 2,023 | 178 | 4,439 |
| Royalties | 297 | — | 1 | 298 |
| Purchased Product | — | 2,023 | — | 2,023 |
| Transportation and Blending | 147 | — | 103 | 250 |
| Operating | 520 | — | 21 | 541 |
| Netback | 1,274 | — | 53 | 1,327 |
| Realized (Gain) Loss on Risk Management | 84 | 8 | — | 92 |
| Operating Margin | 1,190 | (8) | 53 | 1,235 |
(1)Reflects Operating Margin from processing facilities.
(2)These amounts, excluding Netback, are found in Note 1 of the interim Consolidated Financial Statements.
(3)Comparative periods prior to the third quarter of 2023 reflect certain revisions. See Note 39 of the Consolidated Financial Statements and Prior Period Revisions found in the Advisory section of this MD&A for further details.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 76 |
|---|
Offshore
| Basis of Netback Calculation | Adjustments | |||||||
|---|---|---|---|---|---|---|---|---|
| Three Months Ended December 31, 2023 ($ millions) | Atlantic | China | Indonesia (1) | Total<br>Asia Pacific | Total Offshore | Equity Adjustment (1) | Other (2) | Total Offshore (3) |
| Gross Sales | 168 | 346 | 91 | 437 | 605 | (91) | — | 514 |
| Royalties | 4 | 30 | 18 | 48 | 52 | (18) | — | 34 |
| Purchased Product | — | — | — | — | — | — | — | — |
| Transportation and Blending | 7 | — | — | — | 7 | — | — | 7 |
| Operating | 71 | 29 | 17 | 46 | 117 | (15) | 1 | 103 |
| Netback | 86 | 287 | 56 | 343 | 429 | (58) | (1) | 370 |
| Realized (Gain) Loss on Risk Management | — | — | — | — | ||||
| Operating Margin | 429 | (58) | (1) | 370 | ||||
| Basis of Netback Calculation | Adjustments | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Three Months Ended December 31, 2022 ($ millions) | Atlantic | China | Indonesia (1) | Total<br>Asia Pacific | Total Offshore | Equity Adjustment (1) | Other (2) | Total Offshore (3) |
| Gross Sales | 86 | 359 | 77 | 436 | 522 | (77) | — | 445 |
| Royalties | 1 | 20 | 27 | 47 | 48 | (27) | — | 21 |
| Purchased Product | — | — | — | — | — | — | — | — |
| Transportation and Blending | 3 | — | — | — | 3 | — | — | 3 |
| Operating | 48 | 24 | 17 | 41 | 89 | (15) | 10 | 84 |
| Netback | 34 | 315 | 33 | 348 | 382 | (35) | (10) | 337 |
| Realized (Gain) Loss on Risk Management | — | — | — | — | ||||
| Operating Margin | 382 | (35) | (10) | 337 | ||||
| Basis of Netback Calculation | Adjustments | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Year Ended December 31, 2023 ($ millions) | Atlantic | China | Indonesia (1) | Total<br>Asia Pacific | Total Offshore | Equity Adjustment (1) | Other (2) | Total Offshore (3) |
| Gross Sales | 400 | 1,217 | 317 | 1,534 | 1,934 | (317) | — | 1,617 |
| Royalties | 15 | 84 | 74 | 158 | 173 | (74) | 99 | |
| Purchased Product | — | — | — | — | — | — | — | — |
| Transportation and Blending | 16 | — | — | — | 16 | — | — | 16 |
| Operating | 239 | 111 | 58 | 169 | 408 | (47) | 23 | 384 |
| Netback | 130 | 1,022 | 185 | 1,207 | 1,337 | (196) | (23) | 1,118 |
| Realized (Gain) Loss on Risk Management | — | — | — | — | ||||
| Operating Margin | 1,337 | (196) | (23) | 1,118 | ||||
| Basis of Netback Calculation | Adjustments | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Year Ended December 31, 2022 ($ millions) | Atlantic | China | Indonesia (1) | Total<br>Asia Pacific | Total Offshore | Equity Adjustment (1) | Other (2) | Total Offshore (3) |
| Gross Sales | 578 | 1,442 | 271 | 1,713 | 2,291 | (271) | — | 2,020 |
| Royalties | (3) | 80 | 116 | 196 | 193 | (116) | — | 77 |
| Purchased Product | — | — | — | — | — | — | — | — |
| Transportation and Blending | 15 | — | — | — | 15 | — | — | 15 |
| Operating | 175 | 99 | 51 | 150 | 325 | (36) | 29 | 318 |
| Netback | 391 | 1,263 | 104 | 1,367 | 1,758 | (119) | (29) | 1,610 |
| Realized (Gain) Loss on Risk Management | — | — | — | — | ||||
| Operating Margin | 1,758 | (119) | (29) | 1,610 |
(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 West White Rose project expenses.
(3)These amounts, excluding Netback, are found in Note 1 of the interim Consolidated Financial Statements.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 77 |
|---|
Upstream Sales Volumes (1)
The following table provides the sales volumes used to calculate Netback:
| Three Months Ended December 31, | Year Ended December 31, | |||
|---|---|---|---|---|
| (MBOE/d) | 2023 | 2022 | 2023 | 2022 |
| Oil Sands | ||||
| Foster Creek | 192.6 | 184.7 | 187.4 | 189.4 |
| Christina Lake | 238.6 | 246.5 | 234.3 | 247.5 |
| Sunrise | 50.8 | 42.0 | 47.3 | 30.2 |
| Other Oil Sands | 123.4 | 118.5 | 120.5 | 118.7 |
| Total Oil Sands | 605.4 | 591.7 | 589.5 | 585.8 |
| Conventional | 123.8 | 125.5 | 119.9 | 127.2 |
| Offshore | ||||
| Atlantic | 15.0 | 7.3 | 9.6 | 11.3 |
| Asia Pacific | ||||
| China | 44.2 | 47.1 | 40.5 | 48.2 |
| Indonesia | 16.3 | 12.8 | 14.7 | 10.5 |
| Total Asia Pacific | 60.5 | 59.9 | 55.2 | 58.7 |
| Total Offshore | 75.5 | 67.2 | 64.8 | 70.0 |
| Sales Before Internal Consumption | 804.7 | 784.4 | 774.2 | 783.0 |
| Less: Internal Consumption (2) | (104.5) | (93.4) | (92.6) | (86.6) |
| Total Upstream Sales | 700.2 | 691.0 | 681.6 | 696.4 |
(1)Sales volumes exclude the impact of purchased condensate.
(2)Represents natural gas volumes produced by the Conventional segment used for internal consumption by the Oil Sands segment.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 78 |
|---|
Prior Period Revisions
Certain comparative information presented in the Consolidated Statements of Earnings (Loss) and segment disclosures was revised for classification changes.
Classification Revisions
In September 2023, the Company made adjustments to ensure the consistent treatment of sales between segments and to correct the elimination of these transactions on consolidation. The following adjustments were made:
•Report Conventional segment sales between segments on a gross basis, which resulted in a reclassification between gross sales and transportation and blending expense.
•Report sales of feedstock between the Oil Sands, Conventional and U.S. Refining segments on a net basis, which resulted in a reclassification between gross sales and purchased product.
Offsetting adjustments were made to the Corporate and Eliminations segment. The above items had no impact to net earnings (loss), operating margin, segment income (loss), cash flows or financial position.
It was also identified that the elimination of sales of diluent, natural gas and associated transportation costs between segments were recorded to the incorrect line item in the Corporate and Eliminations segment. The adjustment resulted in an understatement of operating expense, overstatement of purchased product and an overstatement of transportation and blending expense on the Consolidated Statements of Earnings (Loss). There was no impact to net earnings (loss), operating margin, segment income (loss), cash flows or financial position.
Change to Reporting Segments
In September 2022, the Company completed the divestiture of the majority of the retail fuels business. In December 2022, Management elected to aggregate the remaining commercial fuels business and the historical retail fuels business into the Canadian Refining segment. Comparative periods were reclassified to reflect this change, with no impact to net earnings (loss), cash flows or financial position.
The following tables reconcile the amounts previously reported in the Consolidated Statements of Earnings (Loss) and segmented disclosures to the corresponding revised amounts:
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 79 | |||||
|---|---|---|---|---|---|---|
| Three Months Ended March 31, 2023 (1) | Three Months Ended June 30, 2023 (2) | |||||
| --- | --- | --- | --- | --- | --- | --- |
| ($ millions) | Previously Reported | Revisions | Revised Balance | Previously Reported | Revisions | Revised Balance |
| Oil Sands Segment | ||||||
| Gross Sales | 5,911 | (204) | 5,707 | 6,556 | (119) | 6,437 |
| Purchased Product | 559 | (204) | 355 | 533 | (119) | 414 |
| 5,352 | — | 5,352 | 6,023 | — | 6,023 | |
| Conventional Segment | ||||||
| Gross Sales | 1,031 | 6 | 1,037 | 615 | 5 | 620 |
| Purchased Product | 510 | (27) | 483 | 352 | (15) | 337 |
| Transportation and Blending | 48 | 33 | 81 | 46 | 20 | 66 |
| 473 | — | 473 | 217 | — | 217 | |
| U.S. Refining Segment | ||||||
| Gross Sales | 5,860 | (231) | 5,629 | 6,198 | (134) | 6,064 |
| Purchased Product | 5,129 | (231) | 4,898 | 5,498 | (134) | 5,364 |
| 731 | — | 731 | 700 | — | 700 | |
| Corporate and Eliminations Segment | ||||||
| Gross Sales | (1,925) | 429 | (1,496) | (2,092) | 248 | (1,844) |
| Purchased Product | (1,499) | 479 | (1,020) | (1,757) | 287 | (1,470) |
| Transportation and Blending | (141) | (134) | (275) | (109) | (98) | (207) |
| Operating | (231) | 84 | (147) | (185) | 59 | (126) |
| (54) | — | (54) | (41) | — | (41) | |
| Consolidated | ||||||
| Purchased Product | 5,792 | 17 | 5,809 | 5,709 | 19 | 5,728 |
| Transportation and Blending | 2,853 | (101) | 2,752 | 2,641 | (78) | 2,563 |
| Operating | 1,552 | 84 | 1,636 | 1,541 | 59 | 1,600 |
| 10,197 | — | 10,197 | 9,891 | — | 9,891 |
(1)Includes revisions to gross sales and purchased product of $204 million in the Oil Sands segment, $27 million in the Conventional segment and $231 million in the U.S. Refining segment related to sales of feedstock between these segments resulting from changing volume requirements on a net basis with an offsetting adjustment to the Corporate and Eliminations segment.
(2)Includes revisions to gross sales and purchased product of $119 million in the Oil Sands segment, $15 million in the Conventional segment and $134 million in the U.S. Refining segment for the reasons noted above with an offsetting adjustment to the Corporate and Eliminations segment.
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 80 | |||||||
|---|---|---|---|---|---|---|---|---|
| Three Months Ended<br>March 31, 2022 | Three Months Ended<br>June 30, 2022 | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| ($ millions) | Previously Reported | Revisions | Segment Aggregation | Revised Balance | Previously Reported | Revisions | Segment Aggregation | Revised Balance |
| Conventional Segment | ||||||||
| Gross Sales | 1,112 | 25 | — | 1,137 | 1,079 | 34 | — | 1,113 |
| Transportation and Blending | 34 | 25 | — | 59 | 34 | 34 | — | 68 |
| 1,078 | — | — | 1,078 | 1,045 | — | — | 1,045 | |
| Canadian Refining Segment | ||||||||
| Gross Sales | 1,044 | — | 563 | 1,607 | 1,521 | — | 724 | 2,245 |
| Purchased Product | 804 | 2 | 529 | 1,335 | 1,296 | (2) | 686 | 1,980 |
| Transportation and Blending | 2 | (2) | — | — | (2) | 2 | — | — |
| Operating | 124 | — | 27 | 151 | 180 | — | 31 | 211 |
| Depreciation, Depletion and <br> Amortization | 42 | — | 8 | 50 | 64 | — | 8 | 72 |
| 72 | — | (1) | 71 | (17) | — | (1) | (18) | |
| Retail Segment | ||||||||
| Gross Sales | 694 | — | (694) | — | 849 | — | (849) | — |
| Purchased Product | 660 | — | (660) | — | 811 | — | (811) | — |
| Operating | 27 | — | (27) | — | 31 | — | (31) | — |
| Depreciation, Depletion and <br> Amortization | 8 | — | (8) | — | 8 | — | (8) | — |
| (1) | — | 1 | — | (1) | — | 1 | — | |
| Corporate and Eliminations Segment | ||||||||
| Gross Sales | (1,761) | (25) | 131 | (1,655) | (1,782) | (34) | 125 | (1,691) |
| Purchased Product | (1,282) | 39 | 131 | (1,112) | (1,111) | 69 | 125 | (917) |
| Transportation and Blending | (221) | (110) | — | (331) | (188) | (145) | — | (333) |
| Operating | (267) | 46 | — | (221) | (395) | 42 | — | (353) |
| 9 | — | — | 9 | (88) | — | — | (88) | |
| Consolidated | ||||||||
| Purchased Product | 7,482 | 41 | — | 7,523 | 9,396 | 67 | — | 9,463 |
| Transportation and Blending | 2,975 | (87) | — | 2,888 | 3,048 | (109) | — | 2,939 |
| Operating | 1,287 | 46 | — | 1,333 | 1,481 | 42 | — | 1,523 |
| 11,744 | — | — | 11,744 | 13,925 | — | — | 13,925 | |
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 81 | |||||||
| --- | --- | |||||||
| Three Months Ended<br>September 30, 2022 | Three Months Ended<br>December 31, 2022 | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- | |
| ($ millions) | Previously Reported | Revisions | Segment Aggregation | Revised Balance | Previously Reported | Revisions | Revised Balance | |
| Oil Sands Segment | ||||||||
| Gross Sales | 8,778 | (14) | — | 8,764 | 6,731 | (78) | 6,653 | |
| Purchased Product | 1,933 | (14) | — | 1,919 | 594 | (78) | 516 | |
| 6,845 | — | — | 6,845 | 6,137 | — | 6,137 | ||
| Conventional Segment | ||||||||
| Gross Sales | 1,010 | 26 | — | 1,036 | 1,131 | 22 | 1,153 | |
| Transportation and Blending | 38 | 26 | — | 64 | 37 | 22 | 59 | |
| 972 | — | — | 972 | 1,094 | — | 1,094 | ||
| Canadian Refining Segment | ||||||||
| Gross Sales | 1,478 | — | 690 | 2,168 | 1,772 | — | 1,772 | |
| Purchased Product | 1,092 | 3 | 655 | 1,750 | 1,324 | — | 1,324 | |
| Transportation and Blending | 3 | (3) | — | — | — | — | — | |
| Operating | 134 | — | 38 | 172 | 170 | — | 170 | |
| Depreciation, Depletion and <br> Amortization | 37 | — | 5 | 42 | 44 | — | 44 | |
| 212 | — | (8) | 204 | 234 | — | 234 | ||
| Retail Segment | ||||||||
| Gross Sales | 881 | — | (881) | — | — | — | — | |
| Purchased Product | 846 | — | (846) | — | — | — | — | |
| Operating | 38 | — | (38) | — | — | — | — | |
| Depreciation, Depletion and <br> Amortization | 5 | — | (5) | — | — | — | — | |
| (8) | — | 8 | — | — | — | — | ||
| U.S. Refining Segment | ||||||||
| Gross Sales | 8,719 | (14) | — | 8,705 | 6,608 | (78) | 6,530 | |
| Purchased Product | 7,944 | (14) | — | 7,930 | 5,747 | (78) | 5,669 | |
| 775 | — | — | 775 | 861 | — | 861 | ||
| Corporate and Eliminations Segment | ||||||||
| Gross Sales | (2,619) | 2 | 191 | (2,426) | (1,749) | 134 | (1,615) | |
| Purchased Product | (2,267) | 65 | 191 | (2,011) | (1,320) | 168 | (1,152) | |
| Transportation and Blending | (119) | (128) | — | (247) | (136) | (128) | (264) | |
| Operating | (256) | 65 | — | (191) | (352) | 94 | (258) | |
| 23 | — | — | 23 | 59 | — | 59 | ||
| Consolidated | ||||||||
| Purchased Product | 10,012 | 40 | — | 10,052 | 6,908 | 12 | 6,920 | |
| Transportation and Blending | 2,684 | (105) | — | 2,579 | 2,826 | (106) | 2,720 | |
| Operating | 1,439 | 65 | — | 1,504 | 1,362 | 94 | 1,456 | |
| 14,135 | — | — | 14,135 | 11,096 | — | 11,096 | ||
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 82 | |||||||
| --- | --- | |||||||
| Twelve Months Ended December 31, 2022 | ||||||||
| --- | --- | --- | --- | |||||
| ($ millions) | Previously Reported | Revisions | Revised Balance | |||||
| Oil Sands Segment | ||||||||
| Gross Sales | 34,775 | (92) | 34,683 | |||||
| Purchased Product | 4,810 | (92) | 4,718 | |||||
| 29,965 | — | 29,965 | ||||||
| Conventional Segment | ||||||||
| Gross Sales | 4,332 | 107 | 4,439 | |||||
| Transportation and Blending | 143 | 107 | 250 | |||||
| 4,189 | — | 4,189 | ||||||
| U.S. Refining Segment | ||||||||
| Gross Sales | 30,310 | (92) | 30,218 | |||||
| Purchased Product | 26,112 | (92) | 26,020 | |||||
| 4,198 | — | 4,198 | ||||||
| Corporate and Eliminations Segment | ||||||||
| Gross Sales | (7,464) | 77 | (7,387) | |||||
| Purchased Product | (5,533) | 341 | (5,192) | |||||
| Transportation and Blending | (664) | (511) | (1,175) | |||||
| Operating | (1,270) | 247 | (1,023) | |||||
| 3 | — | 3 | ||||||
| Consolidated | ||||||||
| Purchased Product | 33,801 | 157 | 33,958 | |||||
| Transportation and Blending | 11,530 | (404) | 11,126 | |||||
| Operating | 5,569 | 247 | 5,816 | |||||
| 50,900 | — | 50,900 | ||||||
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 83 | |||||||
| --- | --- | |||||||
| Twelve Months Ended December 31, 2021 | ||||||||
| --- | --- | --- | --- | --- | ||||
| ($ millions) | Previously Reported | Revisions | Segment Aggregation | Revised Balance | ||||
| Conventional Segment | ||||||||
| Gross Sales | 3,235 | 81 | — | 3,316 | ||||
| Transportation and Blending | 74 | 81 | — | 155 | ||||
| 3,161 | — | — | 3,161 | |||||
| Canadian Refining Segment | ||||||||
| Gross Sales | 4,472 | — | 1,743 | 6,215 | ||||
| Purchased Product | 3,552 | — | 1,604 | 5,156 | ||||
| Operating | 388 | — | 98 | 486 | ||||
| Depreciation, Depletion and <br> Amortization | 167 | — | 59 | 226 | ||||
| 365 | — | (18) | 347 | |||||
| Retail Segment | ||||||||
| Gross Sales | 2,158 | — | (2,158) | — | ||||
| Purchased Product | 2,019 | — | (2,019) | — | ||||
| Operating | 98 | — | (98) | — | ||||
| Depreciation, Depletion and <br> Amortization | 59 | — | (59) | — | ||||
| (18) | — | 18 | — | |||||
| Corporate and Eliminations Segment | ||||||||
| Gross Sales | (5,706) | (81) | 415 | (5,372) | ||||
| Purchased Product | (4,259) | 163 | 415 | (3,681) | ||||
| Transportation and Blending | (676) | (363) | — | (1,039) | ||||
| Operating | (783) | 119 | — | (664) | ||||
| 12 | — | — | 12 | |||||
| Consolidated | ||||||||
| Purchased Product | 23,326 | 163 | — | 23,489 | ||||
| Transportation and Blending | 8,038 | (282) | — | 7,756 | ||||
| Operating | 4,716 | 119 | — | 4,835 | ||||
| 36,080 | — | — | 36,080 | |||||
| Cenovus Energy Inc. – 2023 Management's Discussion and Analysis | 84 | |||||||
| --- | --- |
cve-20231231
Exhibit 99.3
Cenovus Energy Inc.
Consolidated Financial Statements
For the Year Ended December 31, 2023
(Canadian Dollars)
CONSOLIDATED FINANCIAL STATEMENTS
| For the year ended December 31, 2023 | | --- || TABLE OF CONTENTS | | --- || REPORT OF MANAGEMENT | 3 | | --- | --- | | REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 4 | | CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) | 7 | | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | 8 | | CONSOLIDATED BALANCE SHEETS | 9 | | CONSOLIDATED STATEMENTS OF EQUITY | 10 | | CONSOLIDATED STATEMENTS OF CASH FLOWS | 11 | | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | 12 | | 1. DESCRIPTION OF BUSINESS AND SEGMENTED DISCLOSURES | 12 | | 2.BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE | 18 | | 3. SUMMARY OFACCOUNTING POLICIES | 18 | | 4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY | 27 | | 5. ACQUISITIONS | 30 | | 6. GENERAL AND ADMINISTRATIVE | 32 | | 7. FINANCE COSTS | 32 | | 8. INTEGRATION, TRANSACTION AND OTHER COSTS | 32 | | 9. FOREIGN EXCHANGE (GAIN) LOSS, NET | 33 | | 10. DIVESTITURES | 33 | | 11. IMPAIRMENT CHARGES AND REVERSALS | 33 | | 12. OTHER (INCOME) LOSS, NET | 36 | | 13. INCOME TAXES | 36 | | 14. PER SHARE AMOUNTS | 39 | | 15. CASH AND CASH EQUIVALENTS | 40 | | 16. ACCOUNTS RECEIVABLE AND ACCRUED REVENUES | 40 | | 17. INVENTORIES | 40 | | 18. EXPLORATION AND EVALUATION ASSETS, NET | 41 | | 19. PROPERTY, PLANT AND EQUIPMENT, NET | 42 | | 20. LEASES | 43 | | 21. JOINT ARRANGEMENTS | 44 | | 22. OTHER ASSETS | 45 | | 23. GOODWILL | 46 | | 24. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES | 46 | | 25. DEBT AND CAPITAL STRUCTURE | 46 | | 26. CONTINGENT PAYMENTS | 50 | | 27. DECOMMISSIONING LIABILITIES | 50 | | 28. OTHER LIABILITIES | 51 | | 29. PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS | 51 | | 30. SHARE CAPITAL AND WARRANTS | 54 | | 31. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) | 56 | | 32. STOCK-BASED COMPENSATION PLANS | 57 | | 33. EMPLOYEE SALARIES AND BENEFIT EXPENSES | 60 | | 34. RELATED PARTY TRANSACTIONS | 60 | | 35. FINANCIAL INSTRUMENTS | 60 | | 36. RISK MANAGEMENT | 63 | | 37. SUPPLEMENTARY CASH FLOW INFORMATION | 66 | | 38. COMMITMENTS AND CONTINGENCIES | 68 | | 39. PRIOR PERIOD REVISIONS | 68 | | Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 2 | | --- | --- |
REPORT OF MANAGEMENT
Management’s Responsibility for the Consolidated Financial Statements
The accompanying Consolidated Financial Statements of Cenovus Energy Inc. are the responsibility of Management. The Consolidated Financial Statements have been prepared by Management in Canadian dollars in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and include certain estimates that reflect Management’s best judgments.
The Board of Directors has approved the information contained in the Consolidated Financial Statements. The Board of Directors fulfills its responsibility regarding the financial statements mainly through its Audit Committee which is made up of four independent directors. The Audit Committee has a written mandate that complies with the current requirements of Canadian securities legislation and the United States Sarbanes – Oxley Act of 2002 and voluntarily complies, in principle, with the Audit Committee guidelines of the New York Stock Exchange. The Audit Committee meets with Management and the independent auditors on at least a quarterly basis to review and recommend the approval of the interim Consolidated Financial Statements and Management’s Discussion and Analysis to the Board of Directors prior to their public release as well as annually to review the annual Consolidated Financial Statements and Management’s Discussion and Analysis and recommend their approval to the Board of Directors.
Management’s Assessment of Internal Control Over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal control over financial reporting. The internal control system was designed to provide reasonable assurance to Management regarding the preparation and presentation of the Consolidated Financial Statements.
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.
Management has assessed the design and effectiveness of internal control over financial reporting as at December 31, 2023. In making its assessment, Management has used the Committee of Sponsoring Organizations of the Treadway Commission framework in Internal Control – Integrated Framework (2013) to evaluate the design and effectiveness of internal control over financial reporting. Based on their evaluation, Management has concluded that internal control over financial reporting was effective as at December 31, 2023.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, was appointed to audit and provide independent opinions on both the Consolidated Financial Statements and internal control over financial reporting as at December 31, 2023, as stated in their Report of Independent Registered Public Accounting Firm dated February 14, 2024. PricewaterhouseCoopers LLP has provided such opinions.
| /s/ Jonathan M. McKenzie | /s/ Karamjit S. Sandhar |
|---|---|
| Jonathan M. McKenzie | Karamjit S. Sandhar |
| President & Chief Executive Officer | Executive Vice-President & Chief Financial Officer |
| Cenovus Energy Inc. | Cenovus Energy Inc. |
| February 14, 2024 | |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 3 |
| --- | --- |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Cenovus Energy Inc.
Opinions on the Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Cenovus Energy Inc. and its subsidiaries (together, the Company) as of December 31, 2023 and 2022, and the related consolidated statements of earnings (loss), comprehensive income (loss), equity and cash flows for the years then ended, including the related notes (collectively referred to as the Consolidated Financial Statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and its financial performance and its cash flows for the years then ended in conformity with IFRS Accounting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s Management is responsible for these Consolidated Financial Statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s Consolidated Financial Statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the Consolidated Financial Statements included performing procedures to assess the risks of material misstatement of the Consolidated Financial Statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the Consolidated Financial Statements. Our audits also included evaluating the accounting principles used and significant estimates made by Management, as well as evaluating the overall presentation of the Consolidated Financial Statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 4 |
|---|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the Consolidated Financial Statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the Consolidated Financial Statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the Consolidated Financial Statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impact of Crude Oil and Natural Gas Reserves (together, the Reserves) on Property, Plant and Equipment (PP&E), Net within the Oil Sands and Offshore Segments
As described in Notes 1, 3, 4, 11 and 19 to the Consolidated Financial Statements, Management assesses its cash-generating units (CGUs) for indicators of impairment on a quarterly basis or when facts and circumstances suggest that the carrying amount of a CGU, which is net of accumulated depreciation, depletion and amortization (DD&A) and net impairment losses, may exceed its recoverable amount. Management calculates depletion for Oil Sands PP&E using the unit-of-production method based on estimated proved reserves. For Offshore PP&E, Management calculates depletion using the unit-of-production method based on estimated proved developed producing reserves or proved plus probable reserves. Costs subject to depletion include estimated future development costs to be incurred in developing those proved or proved plus probable reserves. As of December 31, 2023, the Company had $24.4 billion and $2.8 billion in Oil Sands and Offshore PP&E, net, respectively. In aggregate, the Company recognized $3.5 billion of DD&A expense and noted no indicators of impairment related to PP&E in the Oil Sands and Offshore segments in the year ended December 31, 2023. Estimating reserves requires the use of significant assumptions and judgments by Management related to expected future production volumes, future development and operating expenses, as well as forward commodity prices. Management’s estimates of reserves used for the calculation of DD&A expense related to PP&E in the Oil Sands and Offshore segments have been developed by Management’s specialists, specifically independent qualified reserves evaluators.
The principal considerations for our determination that performing procedures relating to the impact of reserves on PP&E, net, within the Oil Sands and Offshore segments is a critical audit matter are (i) the significant amount of judgment required by Management, including the use of Management’s specialists, when developing the estimates of reserves; and (ii) there was a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to expected future production volumes, future development and operating expenses, as well as forward commodity prices.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 5 |
|---|
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the Consolidated Financial Statements. These procedures included testing the effectiveness of controls relating to Management’s estimates of reserves and the calculation of DD&A expense related to PP&E in the Oil Sands and Offshore segments. These procedures also included, among others, testing Management’s process for determining DD&A expense for the Oil Sands and Offshore Segments, which included (i) evaluating the appropriateness of the methods used by Management in making these estimates; (ii) testing the completeness and accuracy of underlying data used in Management’s estimates of reserves; (iii) assessing the reasonability of the significant assumptions related to expected future production volumes, future development and operating expenses, as well as forward commodity prices, and (iv) testing the unit-of-production rates used to calculate DD&A expense. The work of Management’s specialists was used in performing the procedures to evaluate the reasonableness of the estimated reserves used in the calculation of DD&A expense related to PP&E in the Oil Sands and Offshore segments. As a basis for using this work, the specialists’ qualifications were understood, and the Company’s relationship with the specialists was assessed. The procedures performed also included evaluation of the methods and significant assumptions used by the specialists, tests of data used by the specialists and an evaluation of the specialists’ findings. Evaluating the significant assumptions used by Management’s specialists related to expected future production volumes, future development and operating expenses, as well as forward commodity prices involved assessing whether the assumptions used were reasonable considering the current and past performance of the Company and consistency with industry pricing forecasts and evidence obtained in other areas of the audit, as applicable.
/s/ PricewaterhouseCoopers LLP
| Chartered Professional Accountants | |
|---|---|
| Calgary, Alberta, Canada | |
| February 14, 2024 | |
| We have served as the Company’s auditor since 2008. | |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 6 |
| --- | --- |
| CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) | |
| --- |
For the years ended December 31,
($ millions, except per share amounts)
| Notes | 2023 | 2022 | |
|---|---|---|---|
| Revenues | 1 | ||
| Gross Sales | 55,474 | 71,765 | |
| Less: Royalties | 3,270 | 4,868 | |
| 52,204 | 66,897 | ||
| Expenses | 1 | ||
| Purchased Product (1) | 24,715 | 33,958 | |
| Transportation and Blending (1) | 10,141 | 11,126 | |
| Operating (1) | 6,352 | 5,816 | |
| (Gain) Loss on Risk Management | 35 | 61 | 1,636 |
| Depreciation, Depletion and Amortization | 11,19,20,22 | 4,644 | 4,679 |
| Exploration Expense | 18 | 42 | 101 |
| (Income) Loss From Equity-Accounted Affiliates | 21 | (51) | (15) |
| General and Administrative | 6 | 688 | 865 |
| Finance Costs | 7 | 671 | 820 |
| Interest Income | (133) | (81) | |
| Integration, Transaction and Other Costs | 8 | 85 | 106 |
| Foreign Exchange (Gain) Loss, Net | 9 | (67) | 343 |
| Revaluation (Gain) Loss | 5 | 34 | (549) |
| Re-measurement of Contingent Payments | 26 | 59 | 162 |
| (Gain) Loss on Divestiture of Assets | 10 | (14) | (269) |
| Other (Income) Loss, Net | 12 | (63) | (532) |
| Earnings (Loss) Before Income Tax | 5,040 | 8,731 | |
| Income Tax Expense (Recovery) | 13 | 931 | 2,281 |
| Net Earnings (Loss) | 4,109 | 6,450 | |
| Net Earnings (Loss) Per Common Share ($) | 14 | ||
| Basic | 2.15 | 3.29 | |
| Diluted | 2.12 | 3.20 |
(1)Comparative periods reflect certain revisions. See Note 39.
See accompanying Notes to the Consolidated Financial Statements.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 7 |
|---|---|
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |
| --- |
For the years ended December 31,
($ millions)
| Notes | 2023 | 2022 | |
|---|---|---|---|
| Net Earnings (Loss) | 4,109 | 6,450 | |
| Other Comprehensive Income (Loss), Net of Tax | 31 | ||
| Items That Will not be Reclassified to Profit or Loss: | |||
| Actuarial Gain (Loss) Relating to Pension and Other Post-Employment Benefits | 29 | (44) | 71 |
| Change in the Fair Value of Equity Instruments at FVOCI (1) | 35 | 56 | 2 |
| Items That may be Reclassified to Profit or Loss: | |||
| Foreign Currency Translation Adjustment | (274) | 713 | |
| Total Other Comprehensive Income (Loss), Net of Tax | (262) | 786 | |
| Comprehensive Income (Loss) | 3,847 | 7,236 |
(1)Fair value through other comprehensive income (loss) (“FVOCI”).
See accompanying Notes to the Consolidated Financial Statements.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 8 |
|---|---|
| CONSOLIDATED BALANCE SHEETS | |
| --- |
As at December 31,
($ millions)
| Notes | 2023 | 2022 | |
|---|---|---|---|
| Assets | |||
| Current Assets | |||
| Cash and Cash Equivalents | 15 | 2,227 | 4,524 |
| Accounts Receivable and Accrued Revenues | 16 | 3,035 | 3,473 |
| Income Tax Receivable | 416 | 121 | |
| Inventories | 17 | 4,030 | 4,312 |
| Total Current Assets | 9,708 | 12,430 | |
| Restricted Cash | 27 | 211 | 209 |
| Exploration and Evaluation Assets, Net | 1,18 | 738 | 685 |
| Property, Plant and Equipment, Net | 1,19 | 37,250 | 36,499 |
| Right-of-Use Assets, Net | 1,20 | 1,680 | 1,845 |
| Income Tax Receivable | 25 | 25 | |
| Investments in Equity-Accounted Affiliates | 21 | 366 | 365 |
| Other Assets | 22 | 318 | 342 |
| Deferred Income Taxes | 13 | 696 | 546 |
| Goodwill | 1,23 | 2,923 | 2,923 |
| Total Assets | 53,915 | 55,869 | |
| Liabilities and Equity | |||
| Current Liabilities | |||
| Accounts Payable and Accrued Liabilities | 24 | 5,480 | 6,124 |
| Income Tax Payable | 88 | 1,211 | |
| Short-Term Borrowings | 25 | 179 | 115 |
| Lease Liabilities | 20 | 299 | 308 |
| Contingent Payments | 26 | 164 | 263 |
| Total Current Liabilities | 6,210 | 8,021 | |
| Long-Term Debt | 25 | 7,108 | 8,691 |
| Lease Liabilities | 20 | 2,359 | 2,528 |
| Contingent Payments | 26 | — | 156 |
| Decommissioning Liabilities | 27 | 4,155 | 3,559 |
| Other Liabilities | 28 | 1,183 | 1,042 |
| Deferred Income Taxes | 13 | 4,188 | 4,283 |
| Total Liabilities | 25,203 | 28,280 | |
| Shareholders’ Equity | 28,698 | 27,576 | |
| Non-Controlling Interest | 14 | 13 | |
| Total Liabilities and Equity | 53,915 | 55,869 | |
| Commitments and Contingencies | 38 |
See accompanying Notes to the Consolidated Financial Statements.
| /s/ Alexander J. Pourbaix | /s/ Jane E. Kinney |
|---|---|
| Alexander J. Pourbaix | Jane E. Kinney |
| Director | Director |
| Cenovus Energy Inc. | Cenovus Energy Inc. |
| February 14, 2024 | |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 9 |
| --- | --- |
| CONSOLIDATED STATEMENTS OF EQUITY | |
| --- |
($ millions)
| Shareholders’ Equity | ||||||||
|---|---|---|---|---|---|---|---|---|
| Common Shares | Preferred Shares | Warrants | Paid in<br><br>Surplus | Retained<br><br>Earnings | AOCI (1) | Total | Non-Controlling Interest | |
| (Note 30) | (Note 30) | (Note 30) | (Note 31) | |||||
| As at December 31, 2021 | 17,016 | 519 | 215 | 4,284 | 878 | 684 | 23,596 | 12 |
| Net Earnings (Loss) | — | — | — | — | 6,450 | — | 6,450 | — |
| Other Comprehensive Income<br> (Loss), Net of Tax | — | — | — | — | — | 786 | 786 | — |
| Total Comprehensive Income (Loss) | — | — | — | — | 6,450 | 786 | 7,236 | — |
| Common Shares Issued Under<br> Stock Option Plans | 170 | — | — | (32) | — | — | 138 | — |
| Purchase of Common Shares Under<br><br>NCIB (2) | (959) | — | — | (1,571) | — | — | (2,530) | — |
| Warrants Exercised | 93 | — | (31) | — | — | — | 62 | — |
| Stock-Based Compensation <br> Expense | — | — | — | 10 | — | — | 10 | — |
| Base Dividends on Common Shares | — | — | — | — | (682) | — | (682) | — |
| Variable Dividends on Common<br>Shares | — | — | — | — | (219) | — | (219) | — |
| Dividends on Preferred Shares | — | — | — | — | (35) | — | (35) | — |
| Non-Controlling Interest | — | — | — | — | — | — | — | 1 |
| As at December 31, 2022 | 16,320 | 519 | 184 | 2,691 | 6,392 | 1,470 | 27,576 | 13 |
| Net Earnings (Loss) | — | — | — | — | 4,109 | — | 4,109 | — |
| Other Comprehensive Income <br> (Loss), Net of Tax | — | — | — | — | — | (262) | (262) | — |
| Total Comprehensive Income (Loss) | — | — | — | — | 4,109 | (262) | 3,847 | — |
| Common Shares Issued Under<br> Stock Option Plans | 58 | — | — | (12) | — | — | 46 | — |
| Purchase of Common Shares Under<br><br>NCIB (2) | (373) | — | — | (688) | — | — | (1,061) | — |
| Warrants Exercised | 26 | — | (8) | — | — | — | 18 | — |
| Warrants Purchased and Cancelled | — | — | (151) | — | (562) | — | (713) | — |
| Stock-Based Compensation <br>Expense | — | — | — | 11 | — | — | 11 | — |
| Base Dividends on Common Shares | — | — | — | — | (990) | — | (990) | — |
| Dividends on Preferred Shares | — | — | — | — | (36) | — | (36) | — |
| Non-Controlling Interest | — | — | — | — | — | — | — | 1 |
| As at December 31, 2023 | 16,031 | 519 | 25 | 2,002 | 8,913 | 1,208 | 28,698 | 14 |
(1)Accumulated other comprehensive income (loss) (“AOCI”).
(2)Normal course issuer bid (“NCIB”).
See accompanying Notes to the Consolidated Financial Statements.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 10 |
|---|---|
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| --- |
For the years ended December 31,
($ millions)
| Notes | 2023 | 2022 | |
|---|---|---|---|
| Operating Activities | |||
| Net Earnings (Loss) | 4,109 | 6,450 | |
| Depreciation, Depletion and Amortization | 11,19,20,22 | 4,644 | 4,679 |
| Deferred Income Tax Expense (Recovery) | 13 | (250) | 642 |
| Unrealized (Gain) Loss on Risk Management | 35 | 52 | (126) |
| Unrealized Foreign Exchange (Gain) Loss | 9 | (210) | 365 |
| Realized Foreign Exchange (Gain) Loss on Non-Operating Items | 98 | 146 | |
| Revaluation (Gain) Loss | 5 | 34 | (549) |
| Re-measurement of Contingent Payments | 26 | 59 | (469) |
| (Gain) Loss on Divestiture of Assets | 10 | (14) | (269) |
| Unwinding of Discount on Decommissioning Liabilities | 27 | 220 | 176 |
| (Income) Loss From Equity-Accounted Affiliates | 21 | (51) | (15) |
| Distributions Received From Equity-Accounted Affiliates | 21 | 149 | 65 |
| Other | (37) | (117) | |
| Settlement of Decommissioning Liabilities | 27 | (222) | (150) |
| Net Change in Non-Cash Working Capital | 37 | (1,193) | 575 |
| Cash From (Used in) Operating Activities | 7,388 | 11,403 | |
| Investing Activities | |||
| Acquisitions, Net of Cash Acquired | 5 | (515) | (397) |
| Capital Investment | 1 | (4,298) | (3,708) |
| Proceeds From Divestitures | 10 | 12 | 1,514 |
| Payment on Divestiture of Assets | 10 | — | (50) |
| Net Change in Investments and Other | (125) | (211) | |
| Net Change in Non-Cash Working Capital | 37 | (369) | 538 |
| Cash From (Used in) Investing Activities | (5,295) | (2,314) | |
| Net Cash Provided (Used) Before Financing Activities | 2,093 | 9,089 | |
| Financing Activities | 37 | ||
| Net Issuance (Repayment) of Short-Term Borrowings | 58 | 34 | |
| Repayment of Long-Term Debt | 25 | (1,346) | (4,149) |
| Principal Repayment of Leases | 20 | (288) | (302) |
| Common Shares Issued Under Stock Option Plans | 46 | 138 | |
| Purchase of Common Shares Under NCIB | 30 | (1,061) | (2,530) |
| Payment for Purchase of Warrants | 30 | (711) | — |
| Proceeds From Exercise of Warrants | 18 | 62 | |
| Base Dividends Paid on Common Shares | 14 | (990) | (682) |
| Variable Dividends Paid on Common Shares | 14 | — | (219) |
| Dividends Paid on Preferred Shares | 14 | (36) | (26) |
| Other | (3) | (2) | |
| Cash From (Used in) Financing Activities | (4,313) | (7,676) | |
| Effect of Foreign Exchange on Cash and Cash Equivalents | (77) | 238 | |
| Increase (Decrease) in Cash and Cash Equivalents | (2,297) | 1,651 | |
| Cash and Cash Equivalents, Beginning of Year | 4,524 | 2,873 | |
| Cash and Cash Equivalents, End of Year | 2,227 | 4,524 |
See accompanying Notes to the Consolidated Financial Statements.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 11 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 1. DESCRIPTION OF BUSINESS AND SEGMENTED DISCLOSURES |
|---|
Cenovus Energy Inc. (“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 the 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 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 maker. The Company’s operating segments are aggregated based on their geographic locations, the nature of the businesses or a combination of these factors. 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, 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. These provide 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 Husky-CNOOC Madura Ltd. (“HCML”), which is engaged in the exploration for and production of NGLs and natural gas in offshore Indonesia.
Downstream Segments
•Canadian Refining, includes the owned and operated Lloydminster upgrading and asphalt refining complex, which converts heavy oil and bitumen into synthetic crude oil, diesel, asphalt and other ancillary products. Cenovus also owns and operates the Bruderheim crude-by-rail terminal and two ethanol plants. The Company’s commercial fuels business across Canada is included in this segment. Cenovus markets its production and third-party commodity trading volumes in an effort to use its integrated network of assets to maximize value. The Company renamed its Canadian Manufacturing segment to Canadian Refining in 2023.
•U.S. Refining, includes the refining of crude oil to produce gasoline, diesel, jet fuel, asphalt and other products at the wholly-owned Lima, Superior and Toledo refineries, and the jointly-owned Wood River and Borger refineries (jointly owned with operator Phillips 66). Cenovus markets some of its own and third-party refined products including gasoline, diesel, jet fuel and asphalt. The Company renamed its U.S. Manufacturing segment to U.S. Refining in 2023.
Corporate and Eliminations
Corporate and Eliminations, 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 feedstock and internal usage of crude oil, natural gas, condensate, other NGLs and refined products between segments; transloading services provided to the Oil Sands segment by the Company’s crude-by-rail terminal; the sale of condensate extracted from blended crude oil production in the Canadian Refining segment and sold to the Oil Sands segment; and unrealized profits in inventory. Eliminations are recorded based on market prices.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 12 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
A) Results of Operations – Segment and Operational Information
| Upstream | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the years ended December 31, | Oil Sands | Conventional | Offshore | Total | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||
| Gross Sales (1) | 26,192 | 34,683 | 3,273 | 4,439 | 1,617 | 2,020 | 31,082 | 41,142 | ||||||||||||||||||
| Less: Royalties | 3,059 | 4,493 | 112 | 298 | 99 | 77 | 3,270 | 4,868 | ||||||||||||||||||
| 23,133 | 30,190 | 3,161 | 4,141 | 1,518 | 1,943 | 27,812 | 36,274 | |||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||
| Purchased Product (1) | 1,457 | 4,718 | 1,695 | 2,023 | — | — | 3,152 | 6,741 | ||||||||||||||||||
| Transportation and Blending (1) | 10,774 | 12,036 | 298 | 250 | 16 | 15 | 11,088 | 12,301 | ||||||||||||||||||
| Operating | 2,716 | 2,930 | 590 | 541 | 384 | 318 | 3,690 | 3,789 | ||||||||||||||||||
| Realized (Gain) Loss on Risk <br> Management | 17 | 1,527 | (5) | 92 | — | — | 12 | 1,619 | ||||||||||||||||||
| Operating Margin | 8,169 | 8,979 | 583 | 1,235 | 1,118 | 1,610 | 9,870 | 11,824 | ||||||||||||||||||
| Unrealized (Gain) Loss on<br><br>Risk Management | 15 | (68) | (19) | 13 | — | — | (4) | (55) | ||||||||||||||||||
| Depreciation, Depletion and <br> Amortization | 2,993 | 2,763 | 386 | 370 | 487 | 585 | 3,866 | 3,718 | ||||||||||||||||||
| Exploration Expense | 19 | 9 | 6 | 1 | 17 | 91 | 42 | 101 | ||||||||||||||||||
| (Income) Loss From Equity-<br> Accounted Affiliates | 6 | 8 | — | — | (57) | (23) | (51) | (15) | ||||||||||||||||||
| Segment Income (Loss) | 5,136 | 6,267 | 210 | 851 | 671 | 957 | 6,017 | 8,075 | Downstream | |||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | ||||||||||||||||||||
| Canadian Refining | U.S. Refining | Total | ||||||||||||||||||||||||
| For the years ended December 31, | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||
| Gross Sales (1) | 6,233 | 7,792 | 26,393 | 30,218 | 32,626 | 38,010 | ||||||||||||||||||||
| Less: Royalties | — | — | — | — | — | — | ||||||||||||||||||||
| 6,233 | 7,792 | 26,393 | 30,218 | 32,626 | 38,010 | |||||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||
| Purchased Product (1) | 4,919 | 6,389 | 23,354 | 26,020 | 28,273 | 32,409 | ||||||||||||||||||||
| Transportation and Blending | — | — | — | — | — | — | ||||||||||||||||||||
| Operating | 639 | 704 | 2,562 | 2,346 | 3,201 | 3,050 | ||||||||||||||||||||
| Realized (Gain) Loss on Risk<br> Management | — | — | — | 112 | — | 112 | ||||||||||||||||||||
| Operating Margin | 675 | 699 | 477 | 1,740 | 1,152 | 2,439 | ||||||||||||||||||||
| Unrealized (Gain) Loss on Risk<br><br>Management | — | — | (17) | 18 | (17) | 18 | ||||||||||||||||||||
| Depreciation, Depletion and<br> Amortization | 185 | 208 | 486 | 640 | 671 | 848 | ||||||||||||||||||||
| Exploration Expense | — | — | — | — | — | — | ||||||||||||||||||||
| (Income) Loss From Equity-Accounted<br> Affiliates | — | — | — | — | — | — | ||||||||||||||||||||
| Segment Income (Loss) | 490 | 491 | 8 | 1,082 | 498 | 1,573 |
(1)Comparative periods reflect certain revisions. See Note 39.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 13 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| Corporate and Eliminations | Consolidated | ||||
|---|---|---|---|---|---|
| For the years ended December 31, | 2023 | 2022 | 2023 | 2022 | |
| Revenues | |||||
| Gross Sales (1) | (8,234) | (7,387) | 55,474 | 71,765 | |
| Less: Royalties | — | — | 3,270 | 4,868 | |
| (8,234) | (7,387) | 52,204 | 66,897 | ||
| Expenses | |||||
| Purchased Product (1) | (6,710) | (5,192) | 24,715 | 33,958 | |
| Transportation and Blending (1) | (947) | (1,175) | 10,141 | 11,126 | |
| Operating (1) | (539) | (1,023) | 6,352 | 5,816 | |
| Realized (Gain) Loss on Risk Management | (3) | 31 | 9 | 1,762 | |
| Unrealized (Gain) Loss on Risk Management | 73 | (89) | 52 | (126) | |
| Depreciation, Depletion and Amortization | 107 | 113 | 4,644 | 4,679 | |
| Exploration Expense | — | — | 42 | 101 | |
| (Income) Loss From Equity-Accounted Affiliates | — | — | (51) | (15) | |
| Segment Income (Loss) | (215) | (52) | 6,300 | 9,596 | |
| General and Administrative | 688 | 865 | 688 | 865 | |
| Finance Costs | 671 | 820 | 671 | 820 | |
| Interest Income | (133) | (81) | (133) | (81) | |
| Integration, Transaction and Other Costs | 85 | 106 | 85 | 106 | |
| Foreign Exchange (Gain) Loss, Net | (67) | 343 | (67) | 343 | |
| Revaluation (Gain) Loss | 34 | (549) | 34 | (549) | |
| Re-measurement of Contingent Payment | 59 | 162 | 59 | 162 | |
| (Gain) Loss on Divestiture of Assets | (14) | (269) | (14) | (269) | |
| Other (Income) Loss, Net | (63) | (532) | (63) | (532) | |
| 1,260 | 865 | 1,260 | 865 | ||
| Earnings (Loss) Before Income Tax | 5,040 | 8,731 | |||
| Income Tax Expense (Recovery) | 931 | 2,281 | |||
| Net Earnings (Loss) | 4,109 | 6,450 |
(1)Comparative periods reflect certain revisions. See Note 39.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 14 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
B) Revenues by Product
| For the years ended December 31, | 2023 | 2022 |
|---|---|---|
| Upstream | ||
| Oil Sands | ||
| Crude Oil (1) | 22,550 | 28,921 |
| NGLs (2) | 352 | 877 |
| Natural Gas and Other | 231 | 392 |
| Conventional | ||
| Crude Oil | 589 | 429 |
| NGLs (2) | 799 | 926 |
| Natural Gas and Other (1) | 1,773 | 2,786 |
| Offshore | ||
| Crude Oil | 385 | 581 |
| NGLs | 280 | 354 |
| Natural Gas | 853 | 1,008 |
| Total Upstream | 27,812 | 36,274 |
| Downstream | ||
| Canadian Refining | ||
| Synthetic Crude Oil | 2,124 | 2,360 |
| Diesel | 1,752 | 2,164 |
| Asphalt | 571 | 620 |
| Gasoline | 522 | 948 |
| Other Products and Services | 1,264 | 1,700 |
| U.S. Refining | ||
| Gasoline | 12,375 | 14,116 |
| Distillates | 9,612 | 11,453 |
| Asphalt | 864 | 533 |
| Other Products (1) | 3,542 | 4,116 |
| Total Downstream | 32,626 | 38,010 |
| Corporate and Eliminations (1) | (8,234) | (7,387) |
| Consolidated | 52,204 | 66,897 |
(1)Comparative periods reflect certain revisions. See Note 39.
(2)Third-party condensate sales are included within NGLs.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 15 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
C) Geographical Information
| Revenues (1) | ||
|---|---|---|
| For the years ended December 31, | 2023 | 2022 |
| Canada (2) | 25,128 | 33,314 |
| United States (2) | 25,943 | 32,221 |
| China | 1,133 | 1,362 |
| Consolidated | 52,204 | 66,897 |
(1)Revenues by country are classified based on where the operations are located.
(2)Comparative periods reflect certain revisions. See Note 39.
| Non-Current Assets (1) | ||
|---|---|---|
| As at December 31, | 2023 | 2022 |
| Canada | 35,876 | 35,194 |
| United States | 5,230 | 4,824 |
| China | 1,608 | 2,064 |
| Indonesia | 344 | 365 |
| Consolidated | 43,058 | 42,447 |
(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.
Major Customers
In connection with the marketing and sale of Cenovus’s own and purchased crude oil, NGLs, natural gas and refined products for the year ended December 31, 2023, Cenovus had two customers (2022 – two) that individually accounted for more than 10 percent of its consolidated gross sales. Sales to these customers, recognized as major international energy companies with investment grade credit ratings, were approximately $18.0 billion and $7.1 billion, respectively (2022 – $16.1 billion and $9.1 billion), and are reported across all of the Company’s operating segments.
D) Assets by Segment
| E&E Assets | PP&E | ROU Assets | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As at December 31, | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||
| Oil Sands | 729 | 674 | 24,443 | 24,657 | 849 | 638 | ||||||
| Conventional | — | 6 | 2,209 | 2,020 | 1 | 2 | ||||||
| Offshore | 9 | 5 | 2,798 | 2,549 | 102 | 152 | ||||||
| Canadian Refining | — | — | 2,469 | 2,466 | 28 | 252 | ||||||
| U.S. Refining | — | — | 5,014 | 4,482 | 268 | 329 | ||||||
| Corporate and Eliminations | — | — | 317 | 325 | 432 | 472 | ||||||
| Consolidated | 738 | 685 | 37,250 | 36,499 | 1,680 | 1,845 | Goodwill | Total Assets | ||||
| --- | --- | --- | --- | --- | ||||||||
| As at December 31, | 2023 | 2022 | 2023 | 2022 | ||||||||
| Oil Sands | 2,923 | 2,923 | 31,673 | 32,248 | ||||||||
| Conventional | — | — | 2,429 | 2,410 | ||||||||
| Offshore | — | — | 3,511 | 3,339 | ||||||||
| Canadian Refining | — | — | 2,960 | 3,172 | ||||||||
| U.S. Refining | — | — | 8,660 | 8,324 | ||||||||
| Corporate and Eliminations | — | — | 4,682 | 6,376 | ||||||||
| Consolidated | 2,923 | 2,923 | 53,915 | 55,869 | ||||||||
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 16 | |||||||||||
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
E) Capital Expenditures (1)
| For the years ended December 31, | 2023 | 2022 |
|---|---|---|
| Capital Investment | ||
| Oil Sands | 2,382 | 1,792 |
| Conventional | 452 | 344 |
| Offshore | ||
| Asia Pacific | 7 | 8 |
| Atlantic | 635 | 302 |
| Total Upstream | 3,476 | 2,446 |
| Canadian Refining | 145 | 117 |
| U.S. Refining | 602 | 1,059 |
| Total Downstream | 747 | 1,176 |
| Corporate and Eliminations | 75 | 86 |
| 4,298 | 3,708 | |
| Acquisitions (Note 5) | ||
| Oil Sands (2) | 37 | 1,609 |
| Conventional | 5 | 12 |
| U.S. Refining (3) | 385 | — |
| 427 | 1,621 | |
| Total Capital Expenditures | 4,725 | 5,329 |
(1)Includes expenditures on PP&E, E&E assets and capitalized interest. Excludes capital expenditures related to the HCML joint venture.
(2)In 2022, 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 International Financial Reporting Standard 3, “Business Combinations” (“IFRS 3”). The acquisition capital above does not include the fair value of the pre-existing interest in SOSP of $1.6 billion.
(3)In 2023, Cenovus was deemed to have disposed of its pre-existing interest in BP-Husky Refining LLC (“Toledo”) and reacquired it at fair value as required by IFRS 3. The acquisition capital above does not include the fair value of the pre-existing interest in Toledo of $368 million.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 17 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 2. BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE |
|---|
In these 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 Consolidated Financial Statements were prepared in accordance with IFRS Accounting Standards as issued by the International Accounting Standards Board and interpretations of the International Financial Reporting Interpretations Committee.
These Consolidated Financial Statements were prepared on a historical cost basis, except as detailed in the Company’s accounting policies as disclosed in Note 3.
These Consolidated Financial Statements were approved by the Board of Directors effective February 14, 2024.
| 3. SUMMARY OF ACCOUNTING POLICIES |
|---|
A) Principles of Consolidation
The Consolidated Financial Statements include the accounts of Cenovus and its subsidiaries. Subsidiaries are entities over which the Company has control. Subsidiaries are consolidated from the date of acquisition of control and continue to be consolidated until the date that there is a loss of control. All intercompany transactions, balances, and unrealized gains and losses from intercompany transactions are eliminated on consolidation.
Interests in joint arrangements are classified as either joint operations or joint ventures, depending on the rights and obligations of the parties to the arrangement. Joint operations arise when the Company has rights to the assets and obligations for the liabilities of the arrangement. The Company’s accounts reflect its share of the assets, liabilities, revenues and expenses from the Company’s activities that are conducted through joint operations with third parties. A portion of the Company’s activities relate to joint ventures, which are accounted for using the equity method of accounting.
An associate is an entity for which the Company has significant influence over but does not control or jointly control the affiliate. Investments in associates are accounted for using the equity method of accounting and are recognized at cost and adjusted thereafter to recognize the Company’s share of the associate’s profit or loss and other comprehensive income (“OCI”).
B) Foreign Currency Translation
The Company’s functional and presentation currency is Canadian dollars. The accounts of the Company’s foreign operations that have a functional currency different from the Company’s presentation currency are translated into the Company’s presentation currency at period-end exchange rates for assets and liabilities, and using average rates over the period for revenues and expenses. Translation gains and losses relating to the foreign operations are recognized in OCI as cumulative translation adjustments.
When the Company disposes of an entire interest in a foreign operation or loses control, joint control, or significant influence over a foreign operation, the foreign currency gains or losses accumulated in OCI related to the foreign operation are recognized in net earnings. When the Company disposes of part of an interest in a foreign operation that continues to be a subsidiary, a proportionate amount of gains and losses accumulated in OCI is allocated between controlling and non-controlling interests.
Transactions in foreign currencies are translated to the respective functional currencies at exchange rates in effect at the dates of the transactions. Monetary assets and liabilities of Cenovus that are denominated in foreign currencies are translated into its functional currency at the rates of exchange in effect at the reporting date. Any gains or losses are recorded in the Consolidated Statements of Earnings (Loss).
C) Revenue Recognition
Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. Cenovus recognizes revenue when it transfers control of the product or service to a customer, which is generally when title passes from the Company to its customer.
Purchases and sales of products that are entered into in contemplation of each other with the same counterparty are recorded on a net basis. Revenues associated with services provided as agent are recorded as the services are provided.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 18 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Cenovus recognizes revenue from the following major products and services:
•Sale of crude oil, NGLs and natural gas.
•Sale of petroleum and refined products.
•Crude oil and natural gas processing services.
•Pipeline transportation, the blending of crude oil and the storage of crude oil, diluent and natural gas.
•Fee-for-service hydrocarbon transloading services.
•Construction services.
The Company satisfies its performance obligations in contracts with customers upon the delivery of crude oil, NGLs, natural gas, and petroleum and refined products, which is generally at a point in time. Performance obligations for crude oil and natural gas processing revenue, transportation services and transloading services are satisfied over time as the service is provided. Cenovus sells its production of crude oil, NGLs, natural gas, and petroleum and refined products generally pursuant to variable price contracts. The transaction price for variable price contracts is based on the commodity price, adjusted for quality, location and other factors. Revenue associated with crude oil, NGLs and natural gas production is recorded net of royalties. Revenue associated with natural gas processing, transportation services and transloading services are generally based on fixed price contracts.
Construction revenue is recognized for general contractor services that the Company provides to HMLP and includes fixed price and cost-plus contracts. Revenue from fixed price construction contracts is recognized as performance obligations are met and revenue from cost-plus contracts are recognized as services are performed.
The Company has take-or-pay contracts where Cenovus has long-term supply commitments in return for purchasers to pay for minimum quantities, whether or not the customer takes the delivery. If a purchaser has a right to defer delivery to a later date, the performance obligation has not been satisfied and revenue is deferred and recognized only when the product is delivered or the deferral provision can no longer be extended.
Cenovus’s revenue transactions do not contain significant financing components and payments are typically due within 30 days of revenue recognition. The Company does not adjust transaction prices for the effects of a significant financing component when the period between the transfer of the promised goods or services to the customer and payment by the customer is less than one year. The Company does not disclose or quantify information about remaining performance obligations that have an original expected duration of one year or less and it does not have any long-term contracts with the exception of certain construction contracts with HMLP and take-or-pay contracts with unfulfilled performance obligations.
D) Purchased Product
The costs of refining feedstock, crude oil and diluent purchased for optimization activities, and costs associated with transporting refined products to market, are recorded as purchased product.
E) Transportation and Blending
The costs associated with the transportation of crude oil, NGLs and natural gas for upstream operations, including the cost of diluent used in blending, are recognized when the product is sold.
F) Exploration Expense
Costs incurred prior to obtaining the legal right to explore (pre-exploration costs) are expensed in the period in which they are incurred as exploration expense.
Certain costs incurred after the legal right to explore is obtained are initially capitalized. If it is determined that the field/project/area is not technically feasible and commercially viable or if the Company decides not to continue the exploration and evaluation activity, the unrecoverable accumulated costs are expensed as exploration expense.
G) Employee Benefit Plans
The Company provides employees with a pension plan that includes either a defined contribution or defined benefit component.
Other post-employment benefit (“OPEB”) plans are also provided to qualifying employees. In some cases, the benefits are provided through medical care plans to which the Company, the employees, the retirees and covered family members contribute. In some plans, benefits are not funded before retirement.
Pension expense for the defined contribution pension is recorded as the benefits are earned.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 19 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
The cost of the defined benefit pension and OPEB plans are actuarially determined using the projected unit credit method. The amount recognized in other liabilities on the Consolidated Balance Sheets for the defined benefit pension and OPEB plans is the present value of the defined benefit obligation less the fair value of plan assets. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans.
Changes in the defined benefit obligation from service costs, net interest and re-measurements are recognized as follows:
•Service costs, including current service costs, past service costs, gains and losses on curtailments, and settlements, are recorded with pension benefit costs.
•Net interest is calculated by applying the same discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit asset or liability measured. Interest expense and interest income on net post-employment benefit liabilities and assets are recorded with pension benefit costs in operating, and general and administrative expenses, as well as PP&E and E&E assets.
•Re-measurements, composed of actuarial gains and losses, the effect of changes to the asset ceiling (excluding interest) and the return on plan assets (excluding interest income), are charged or credited to equity in OCI in the period in which they arise. Re-measurements are not reclassified to net earnings in subsequent periods.
Pension benefit costs are recorded in operating, and general and administrative expenses, as well as PP&E and E&E assets, corresponding to where the associated salaries of the employees rendering the service are recorded.
H) Government Grants
Government grants are recognized when there is reasonable assurance that the grant will be received and all conditions associated with the grant are met. If a grant is received, but reasonable assurance and compliance with conditions is not achieved, the grant is recognized as a deferred liability until the conditions are fulfilled. Grants related to assets are recorded as a reduction to the asset’s carrying value and are depreciated over the useful life of the asset. Claims under government grant programs related to income are recorded as other income in the period in which eligible expenses were incurred or when the services were performed.
I) Income Taxes
Income taxes comprise current and deferred taxes. Income taxes are provided for on a non-discounted basis at amounts expected to be paid using the tax rates and laws that were enacted or substantively enacted at the Consolidated Balance Sheet date.
Cenovus follows the liability method of accounting for income taxes, where deferred income taxes are recorded for the effect of any temporary difference between the accounting and income tax basis of an asset or liability, using the substantively enacted income tax rates expected to apply when the assets are realized or liabilities are settled. Deferred income tax balances are adjusted to reflect changes in income tax rates that are substantively enacted with the adjustment being recognized in net earnings in the period that the change occurs, except when it relates to items charged or credited directly to equity or OCI, in which case the deferred income tax is also recorded in equity or OCI, respectively.
Deferred income tax is recognized on temporary differences arising from investments in subsidiaries except in the case where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future or when distributions can be made without incurring income taxes.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax assets and liabilities are only offset where they arise within the same entity and tax jurisdiction. Deferred income tax assets and liabilities are presented as non-current.
J) Related Party Transactions
The Company enters into transactions and agreements in the normal course of business with certain related parties, joint arrangements and associates. Proceeds from the disposition of assets to related parties are recognized at fair value. Independent opinions of fair value may be obtained to confirm the estimated fair value of proceeds.
K) Net Earnings per Share Amounts
Basic net earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted net earnings per share is calculated giving effect to the potential dilution that would occur if stock options or other contracts to issue common shares were exercised or converted to common shares. The treasury stock method is used to determine the dilutive effect of stock options and other dilutive instruments. The treasury stock method assumes that proceeds received from the exercise of in-the-money stock options and other dilutive instruments are used to purchase common shares at the average market price. For those contracts that may be settled in cash or in shares at the holder’s option, the more dilutive of cash settlement and share settlement is used in calculating diluted earnings per share.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 20 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
L) Cash and Cash Equivalents
Cash and cash equivalents include short-term investments, such as money market deposits or similar type instruments with a maturity of three months or less.
Cash and cash equivalents that are not available for use are classified as restricted cash. When restricted cash is not expected to be used within twelve months, it is classified as a non-current asset.
M) Inventories
Product inventories are valued at the lower of cost, using a first-in, first-out or weighted average cost basis, and net realizable value. The cost of inventory includes all costs incurred in the normal course of business to bring each product to its present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less any expected selling costs. If the carrying amount exceeds net realizable value, a write-down is recognized. The write-down may be reversed in a subsequent period if circumstances which caused it no longer exist and the inventory is still on hand.
N) Exploration and Evaluation Assets
E&E assets consist of exploratory projects for crude oil, natural gas and NGLs that are pending the determination of proved reserves. Certain costs incurred after obtaining the legal right to explore an area and before establishing the technical feasibility and commercial viability of the field/project/area, are capitalized as E&E assets. E&E assets are carried forward until technical feasibility and commercial viability of the field/project/area is established or the assets are determined to be impaired or the future economic value has decreased. E&E assets are subject to regular technical, commercial and Management review to confirm the continued intent to develop the resources.
Assets classified as E&E may have sales of crude oil, NGLs or natural gas prior to the reclassification to PP&E. These operating results are recognized in the Consolidated Statements of Earnings (Loss). A depletion charge, recorded as depreciation, depletion and amortization (“DD&A”), is recognized on this production using a unit-of-production method based on estimated proved reserves determined using forward prices and costs and considering any estimated future costs to be incurred in developing the proved reserves. Natural gas reserves are converted on an energy equivalent basis.
Non-producing assets classified as E&E are not depleted.
Once technical feasibility and commercial viability is established, the carrying value of the E&E asset is tested for impairment. The carrying value, net of any impairment loss, is then reclassified as PP&E.
Any gains or losses from the divestiture of E&E assets are recognized in net earnings.
O) Property, Plant and Equipment
PP&E is stated at cost less accumulated DD&A, adjusted for impairment losses and impairment reversals.
Expenditures related to renewals or enhancements that improve the productive capacity or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred. Land is not depreciated.
Crude Oil and Natural Gas Properties
Development and production assets are capitalized on an area-by-area basis and include all costs associated with the development and production of crude oil and natural gas properties and related infrastructure facilities, as well as any E&E expenditures incurred in finding reserves of crude oil, NGLs or natural gas transferred from E&E assets. Capitalized costs include directly attributable internal costs, decommissioning liabilities and, for qualifying assets, borrowing costs directly associated with the acquisition of, the exploration for, and the development of crude oil and natural gas reserves.
For onshore assets, which includes assets from the Oil Sands and Conventional segments, costs accumulated within each area are depleted using the unit-of-production method based on estimated proved reserves determined using forward prices and costs. Offshore assets are depleted using the unit-of-production method based on estimated proved developed producing reserves or proved plus probable reserves determined using forward prices and costs. For the purpose of these calculations, natural gas is converted to crude oil on an energy equivalent basis. The unit-of-production method based on proved reserves or proved plus probable reserves takes into account any expenditures incurred to date together with future development costs to be incurred in developing those reserves.
Exchanges of development and production assets are measured at fair value unless the transaction lacks commercial substance or the fair value of either the asset received, or the asset given up, cannot be reliably measured. When fair value is not used, the carrying amount of the asset given up is used as the cost of the asset acquired.
Included in crude oil and natural gas properties are information technology assets used to support the upstream business and are depreciated on a straight-line basis over their useful lives of three years.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 21 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Refining Assets
The initial costs of refining and upgrading PP&E are capitalized when incurred. Costs include the cost of constructing or otherwise acquiring the equipment or facilities, the cost of installing the asset and making it ready for its intended use, the associated decommissioning costs and, for qualifying assets, borrowing costs.
Refining and upgrading assets are depreciated on a straight-line basis over the estimated service life of each component of the refinery. The major components are depreciated as follows:
•Land improvements and buildings: 15 to 40 years.
•Office improvements and buildings: 3 to 15 years.
•Refining equipment: 10 to 60 years.
Also included in refining assets are information technology assets used to support the downstream business that are depreciated on a straight-line basis over their useful lives of three years. The residual value, the method of amortization and the useful life of each component are reviewed annually and adjusted on a prospective basis, if appropriate.
Processing, Transportation and Storage Assets, Commercial Fuels Business and Other
Depreciation for substantially all other PP&E is calculated on a straight-line basis based on the estimated useful lives of assets, which range from three to 60 years. The useful lives are estimated based upon the period the asset is expected to be available for use by the Company.
The residual value, the method of amortization and the useful life of the assets are reviewed annually and adjusted on a prospective basis, if appropriate.
P) Impairment and Impairment Reversals of Non-Financial Assets
PP&E, E&E assets and ROU assets are reviewed separately for indicators of impairment on a quarterly basis or when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Goodwill is tested for impairment at least annually.
If indicators of impairment exist, the recoverable amount of the asset or cash-generating unit (“CGU”) is estimated as the greater of value-in-use (“VIU”) and fair value less costs of disposal (“FVLCOD”). VIU is estimated as the present value of the future cash flows expected to arise from the continuing use of a CGU or an asset. FVLCOD is the amount that would be realized from the disposition of an asset or CGU in an arm’s length transaction between knowledgeable and willing parties. For Cenovus’s upstream assets, FVLCOD is estimated based on the discounted after-tax cash flows of reserves using forward prices, costs to develop and operating costs, consistent with Cenovus’s independent qualified reserves evaluators (“IQREs”), and may consider an evaluation of comparable asset transactions. For Cenovus's downstream assets, FVLCOD is estimated based on discounted after-tax cash flows of refined product production using forward crude oil prices, forward crack spreads, operating expenses and future capital expenditures.
E&E assets are allocated to a related CGU containing development and production assets for the purposes of testing for impairment. ROU assets may be tested as part of a CGU, as a separate CGU or as an individual asset. Goodwill is allocated to the CGUs to which it contributes to the future cash flows.
If the recoverable amount of the CGU is less than the carrying amount, an impairment loss is recognized. An impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets in the CGU. Goodwill impairments are not reversed.
Impairment losses on PP&E and ROU assets are recognized in the Consolidated Statements of Earnings (Loss) as additional DD&A and E&E asset impairments or write-downs are recognized as exploration expense.
Impairment losses recognized in prior periods, other than goodwill impairments, are assessed at each reporting date for any indicators that the impairment losses may no longer exist or may have decreased. In the event that an impairment loss reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the carrying amount does not exceed the amount that would have been determined had no impairment loss been recognized on the asset in prior periods. The amount of the reversal is recognized in net earnings.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 22 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Q) Leases
The Company assesses whether a contract is a lease based on whether the contract conveys the right to control the use of an underlying asset for a period of time in exchange for consideration. The Company allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices. However, for the leases of storage tanks, the Company has elected not to separate non-lease components.
As Lessee
Leases are recognized as a ROU asset and a corresponding lease liability on the date that the leased asset is available for use by the Company. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of fixed payments, restoration and removal costs, variable lease payments that are based on an index or a rate, estimated residual value guarantees, purchase options expected to be exercised, and termination penalties, less lease incentive receivables. These payments are discounted using the Company’s incremental borrowing rate when the rate implicit in the lease is not readily available. The Company uses a single discount rate for a portfolio of leases with reasonably similar characteristics.
Lease payments are allocated between the liability and finance costs. Finance costs are charged to net earnings over the lease term.
The lease liability is measured at amortized cost using the effective interest method. It is re-measured when there is a change in the future lease payments due to a change in an index or rate, if there is a change in the expected residual value guarantee or if the Company reconsiders the exercise of a purchase, extension or termination option that is within the Company's control.
When the lease liability is re-measured, a corresponding adjustment is made to the carrying amount of the ROU asset or is recorded in the Consolidated Statements of Earnings (Loss) if the carrying amount of the ROU asset has been reduced to zero.
The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability, any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or site on which it is located less any lease payments made at or before the commencement date.
The ROU asset is depreciated on a straight-line basis over the shorter of the estimated useful life of the asset or lease term.
Leases that have a term of less than twelve months or leases for which the underlying asset is of low value are recognized as an expense in the Consolidated Statements of Earnings (Loss) on a systematic basis over the lease term in either operating, transportation or general and administrative expense.
A lease modification will be accounted for as a separate lease if the modification increases the scope of the lease and if the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope. For a modification that is not a separate lease or where the increase in consideration is not commensurate, at the effective date of the lease modification, the Company will re-measure the lease liability using the Company’s incremental borrowing rate, when the rate implicit to the lease is not readily available, with a corresponding adjustment to the ROU asset. A modification that decreases the scope of the lease will be accounted for by decreasing the carrying amount of the ROU asset, and recognizing a gain or loss in net earnings that reflects the proportionate decrease in scope.
As Lessor
Leases where the Company transfers substantially all of the risk and rewards incidental to ownership of the underlying asset are classified as financing leases. Under a finance lease, the Company recognizes a receivable at an amount equal to the net investment in the lease which is the present value of the aggregate of lease payments receivable by the lessor. If substantially all the risks and rewards of ownership of an asset are not transferred the lease is classified as an operating lease. The Company recognizes lease payments received under operating leases as income on a straight-line basis over the lease term as other income.
When the Company is an intermediate lessor, it accounts for its interest in the head lease and the sublease separately. It assesses the lease classification of a sublease with reference to the ROU asset from the head lease not with reference to the underlying assets. If the head lease is a short-term lease to which the Company applies the exemption for lease accounting, the sublease is classified as an operating lease.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 23 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
R) Intangible Assets
Intangible assets acquired separately are initially measured at cost. Following initial recognition, intangible assets are recognized at cost less any accumulated amortization and accumulated impairment losses. Intangible assets with finite lives are amortized over the useful life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization expense on intangible assets is recognized in the Consolidated Statements of Earnings (Loss) in the expense category consistent with the function of the intangible asset. Impairment losses are recognized in the Consolidated Statements of Earnings (Loss) as DD&A.
S) Business Combinations and Goodwill
Business combinations are accounted for using the acquisition method of accounting in which the identifiable assets acquired, liabilities assumed and non-controlling interest, if any, are recognized and measured at their fair value at the date of acquisition, with the exception of income taxes, stock-based compensation, lease liabilities and ROU assets. Any excess of the purchase price plus any non-controlling interest over the value of the net assets acquired is recognized as goodwill. Any deficiency of the purchase price over the value of the net assets acquired is credited to net earnings. Acquisition costs are expensed as incurred.
At acquisition, goodwill is allocated to the CGU to which it relates. Subsequent measurement of goodwill is at cost less any accumulated impairment losses.
Contingent consideration transferred in a business combination is measured at fair value on the date of acquisition and classified as a financial liability or equity in accordance with the terms of the agreement. Contingent consideration classified as a liability is re-measured at fair value at each reporting date, with changes in fair value recognized in net earnings. Payments are classified as cash used in investing activities until the cumulative payments exceed the acquisition date fair value of the liability. Cumulative payments in excess of the acquisition date fair value are classified as cash used in operating activities. Contingent consideration classified as equity are not re-measured and settlements are accounted for within equity.
When a business combination is achieved in stages, the Company re-measures its pre-existing interest at the acquisition date fair value and recognizes the resulting gain or loss, if any, in net earnings.
T) Provisions
A provision is recognized if, as a result of a past event, the Company has a present obligation, legal or constructive, that can be estimated reliably, and it is more likely than not that an outflow of economic benefits will be required to settle the obligation. Where applicable, provisions are determined by discounting the expected future cash flows at a pre-tax credit-adjusted rate that reflects the current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognized as a finance cost in the Consolidated Statements of Earnings (Loss).
Decommissioning Liabilities
Decommissioning liabilities include those legal or constructive obligations where the Company will be required to retire tangible long-lived assets such as producing well sites, upstream processing facilities, surface and subsea plant and equipment, refining facilities and the crude-by-rail terminal. Cenovus recognizes decommissioning liabilities when the disturbances occur. The amount recognized is the present value of estimated future expenditures required to settle the obligation using a credit-adjusted risk-free rate. A corresponding asset equal to the initial estimate of the liability is capitalized as part of the cost of the related long-lived asset. Changes in the estimated liability resulting from revisions to expected timing or future decommissioning costs are recognized as a change in the decommissioning liability and the related long-lived asset. The amount capitalized in PP&E is depreciated over the useful life of the related asset.
Actual expenditures incurred are charged against the accumulated liability.
Onerous Contract Provisions
Onerous contract provisions are recognized when the unavoidable costs of meeting the obligation exceed the economic benefit derived from the contract. The provision for onerous contracts is measured at the present value of estimated future cash flows underlying the obligations less any estimated recoveries, discounted at the credit-adjusted risk-free rate. Changes in the underlying assumptions are recognized in the Consolidated Statements of Earnings (Loss).
Renewable Fuel Obligations
The Company’s U.S. refining operations incur a renewable volume obligation (“RVO”), which the Company settles annually using renewable identification numbers (“RINs”). After considering RINs on hand, the RVO is measured at the expected market price or on a contracted forward rate, if applicable, of the additional RINs required to settle the compliance obligation. RINs purchased with biofuel are measured using the average market price in the month purchased. RINs purchased on a secondary market are measured at cost. RINs are not amortized. A net RIN position is presented in other assets and a net RVO position is included in other liabilities.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 24 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
U) Share Capital and Warrants
Common shares and preferred shares are classified as equity. Preferred shares are cancellable and redeemable only at the Company’s option. Dividends on common shares consist of base dividends and variable dividends. Variable dividends are reviewed quarterly and paid if certain performance measurements are met at the end of the applicable period. Dividends on common shares and preferred shares are discretionary and payable only if declared by Cenovus’s Board of Directors. 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.
Transaction costs directly attributable to the issue of common shares and preferred shares are recognized as a deduction from equity, net of any income taxes. Dividends on common shares and preferred shares are recognized within equity. When purchased, common shares are reduced by the average carrying value with the excess of the purchase price recognized as a reduction in Cenovus’s paid in surplus. Common shares are cancelled subsequent to being purchased.
Warrants issued in the transaction to combine Cenovus and Husky Energy Inc. (the “Husky Arrangement”) are financial instruments classified as equity and were measured at fair value upon issuance. On exercise, the cash consideration received by the Company and the associated carrying value of the warrants are recorded as share capital.
V) Stock-Based Compensation
Cenovus has a number of stock-based compensation plans which include stock options with associated net settlement rights (“NSRs”), Cenovus replacement stock options, performance share units (“PSUs”), restricted share units (“RSUs”) and deferred share units (“DSUs”). Stock-based compensation costs are recorded in general and administrative expenses.
Stock Options With Associated Net Settlement Rights
NSRs are accounted for as equity instruments, which are measured at fair value on the grant date using the Black-Scholes-Merton valuation model and are not revalued at each reporting date. The fair value is recognized as stock-based compensation over the vesting period, with a corresponding increase recorded as paid in surplus in shareholders’ equity. On exercise, the cash consideration received by the Company and the associated paid in surplus are recorded as share capital.
Cenovus Replacement Stock Options
Cenovus replacement stock options are accounted for as liability instruments, which are measured at fair value at each period end using the Black-Scholes-Merton valuation model. The fair value is recognized as stock-based compensation over the vesting period. When stock options are settled for cash, the liability is reduced by the cash settlement paid. When stock options are settled for common shares, the cash consideration received by the Company and the previously recorded liability associated with the stock option is recorded as share capital.
Performance, Restricted and Deferred Share Units
PSUs, RSUs and DSUs are accounted for as liability instruments and are measured at fair value based on the market value of Cenovus’s common shares at each period end. The fair value is recognized as stock-based compensation over the vesting period. Fluctuations in the fair values are recognized as stock-based compensation in the period they occur. Cenovus has certain PSU and RSU plans that may be settled in cash or common shares and certain plans that are settled in cash.
W) Financial Instruments
The Company’s financial assets include cash and cash equivalents, accounts receivable and accrued revenues, restricted cash, risk management assets, net investment in finance leases, investments in the equity of companies and long-term receivables. The Company’s financial liabilities include accounts payable and accrued liabilities, short-term borrowings, lease liabilities, contingent payments, risk management liabilities and long-term debt.
Financial instruments are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets and liabilities are not offset unless the Company has the current legal right to offset and intends to settle on a net basis or settle the asset and liability simultaneously.
The Company characterizes its fair value measurements into a three-level hierarchy depending on the degree to which the inputs are observable, as follows:
•Level 1 inputs are quoted prices in active markets for identical assets and liabilities.
•Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly or indirectly.
•Level 3 inputs are unobservable inputs for the asset or liability.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 25 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Classification and Measurement of Financial Assets
The initial classification of a financial asset depends upon the Company’s business model for managing its financial assets and the contractual terms of the cash flows. There are three measurement categories into which the Company classified its financial assets:
•Amortized Cost: Includes assets that are held within a business model whose objective is to hold assets to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that represent solely payments of principal and interest.
•FVOCI: Includes assets that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets, where its contractual terms give rise on specified dates to cash flows that represent solely payments of principal and interest.
•Fair Value through Profit or Loss (“FVTPL”): Includes assets that do not meet the criteria for amortized cost or FVOCI and are measured at fair value through profit or loss. This includes all derivative financial assets.
On initial recognition, the Company may irrevocably designate a financial asset that meets the amortized cost or FVOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. On initial recognition of an equity investment that is not held-for-trading, the Company may irrevocably elect to present subsequent changes in the investment’s fair value in OCI. There is no subsequent reclassification of fair value changes to earnings following the derecognition of the investment. However, dividends that reflect a return on investment continue to be recognized in net earnings. This election is made on an investment-by-investment basis.
At initial recognition, the Company measures a financial asset at its fair value and, in the case of a financial asset not at FVTPL, including transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are recorded as an expense in net earnings.
Financial assets are reclassified subsequent to their initial recognition only if the business model for managing those financial assets changes. The affected financial assets will be reclassified on the first day of the first reporting period following the change in the business model.
A financial asset is derecognized when the rights to receive cash flows from the asset have expired or are transferred, and the Company has transferred substantially all the risks and rewards of ownership.
Impairment of Financial Assets
The Company recognizes loss allowances for expected credit losses (“ECLs”) on its financial assets measured at amortized cost. Due to the nature of its financial assets, Cenovus measures loss allowances at an amount equal to expected lifetime ECLs. Lifetime ECLs are the anticipated ECLs that result from all possible default events over the expected life of a financial asset. ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e., the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Company expects to receive). ECLs are discounted at the effective interest rate of the related financial asset. The Company does not have any financial assets that contain a financing component.
Classification and Measurement of Financial Liabilities
A financial liability is initially classified as measured at amortized cost or FVTPL. A financial liability is classified as measured at FVTPL if it is held-for-trading, a derivative, or designated as FVTPL on initial recognition. The classification of a financial liability is irrevocable.
Financial liabilities at FVTPL (other than financial liabilities designated at FVTPL) are measured at fair value with changes in fair value, along with any interest expense, recognized in net earnings. Other financial liabilities are initially measured at fair value less directly attributable transaction costs and are subsequently measured at amortized cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognized in net earnings. Any gain or loss on derecognition is also recognized in net earnings.
A financial liability is derecognized when the obligation is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same counterparty with substantially different terms, or the terms of an existing liability are substantially modified, it is treated as a derecognition of the original liability and the recognition of a new liability. When the terms of an existing financial liability are altered, but the changes are considered non-substantial, it is accounted for as a modification to the existing financial liability. Where a liability is substantially modified it is considered to be extinguished and a gain or loss is recognized in net earnings based on the difference between the carrying amount of the liability derecognized and the fair value of the revised liability. Where a liability is modified in a non-substantial way, the amortized cost of the liability is re-measured based on the new cash flows and a gain or loss is recorded in net earnings.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 26 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Derivatives
Derivative financial instruments are primarily used to manage economic exposure to market risks relating to commodity prices, foreign currency exchange rates and interest rates. Policies and procedures are in place with respect to required documentation and approvals for the use of derivative financial instruments. Where specific financial instruments are executed, the Company assesses, both at the time of purchase and on an ongoing basis, whether the financial instrument used in the particular transaction is effective in offsetting changes in fair values or cash flows of the transaction.
Derivative financial instruments are measured at FVTPL unless designated for hedge accounting. Derivative instruments that do not qualify as hedges, or are not designated as hedges, are recorded using mark-to-market accounting whereby instruments are recorded in the Consolidated Balance Sheets as either an asset or liability with changes in fair value recognized in net earnings as a gain or loss on risk management. The estimated fair value of all derivative instruments is based on quoted market prices or, in their absence, third-party market indications and forecasts.
X) Recent Accounting Pronouncements
New Accounting Standards and Interpretations not yet Adopted
There are new accounting standards, amendments to accounting standards and interpretations that are effective for annual periods beginning on or after January 1, 2024, and have not been applied in preparing the Consolidated Financial Statements for the year ended December 31, 2023. These standards and interpretations are not expected to have a material impact on the Company’s Consolidated Financial Statements or the Company's business.
| 4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY |
|---|
The timely preparation of the Consolidated Financial Statements in accordance with IFRS requires that Management make estimates and assumptions, and use judgment regarding the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the period. Such estimates primarily relate to unsettled transactions and events as of the date of the Consolidated Financial Statements. The estimated fair value of financial assets and liabilities, by their very nature, are subject to measurement uncertainty. Accordingly, actual results may differ from estimated amounts as future confirming events occur.
A) Critical Judgments in Applying Accounting Policies
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 the Company’s Consolidated Financial Statements.
Joint Arrangements
The classification of a joint arrangement that is held in a separate vehicle as either a joint operation or a joint venture requires judgment.
Cenovus has a 50 percent interest in WRB Refining LP (“WRB”), a jointly controlled entity. The joint arrangement meets the definition of a joint operation under IFRS 11, “Joint Arrangements” (“IFRS 11”); therefore, the Company’s share of the assets, liabilities, revenues and expenses are recorded in the Consolidated Financial Statements.
Prior to February 28, 2023, Cenovus held a 50 percent interest in Toledo, which was jointly controlled with BP Products North America Inc. (“bp”) and met the definition of a joint operation under IFRS 11. As such, Cenovus recognized its share of the assets, liabilities, revenues and expenses in its consolidated results. Subsequent to February 28, 2023, Cenovus controls Toledo, as defined under IFRS 10, “Consolidated Financial Statements” (“IFRS 10”), and, accordingly, Toledo was consolidated.
Prior to August 31, 2022, Cenovus held a 50 percent interest in SOSP, which was jointly controlled with BP Canada Energy Group ULC (“bp Canada”) and met the definition of a joint operation under IFRS 11. As such, Cenovus recognized its share of the assets, liabilities, revenues and expenses in its consolidated results. Subsequent to August 31, 2022, Cenovus controls SOSP, as defined under IFRS 10, and, accordingly, SOSP was consolidated.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 27 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
In determining the classification of its joint arrangements under IFRS 11, the Company considered the following:
•The original intention of the joint arrangements was to form an integrated North American heavy oil business. Partnerships are “flow-through” entities.
•The agreements require the partners to make contributions if funds are insufficient to meet the obligations or liabilities of the corporation and partnerships. The past development of Toledo and SOSP, and the past and future development of WRB, is dependent on funding from the partners by way of capital contribution commitments, notes payable and loans.
•WRB has third-party debt facilities to cover short-term working capital requirements. SOSP had a third-party debt facility.
•Phillips 66, as operator of WRB, either directly or through wholly-owned subsidiaries, provides marketing services, purchases necessary feedstock, and arranges for transportation and storage, on the partners' behalf as the agreements prohibit the partners from undertaking these roles themselves. In addition, the joint arrangement does not have employees and, as such, is not capable of performing these roles.
•As the operator of Toledo until February 28, 2023, bp, either directly or through wholly-owned subsidiaries, purchased necessary feedstock, and arranged for transportation and storage, on the partners' behalf. SOSP was operated like most typical western Canadian working interest relationships where the operating partner takes product on behalf of the participants in accordance with the partnership agreement.
•In each arrangement, output is taken by the partners, indicating that the partners have the rights to the economic benefits of the assets and the obligation for funding the liabilities of the arrangements.
Exploration and Evaluation Assets
The application of the Company’s accounting policy for E&E expenditures requires judgment in determining whether it is likely that future economic benefit exists when activities have not reached a stage where technical feasibility and commercial viability can be reasonably determined. Factors such as drilling results, future capital programs, future operating expenses, as well as estimated reserves and resources are considered. In addition, Management uses judgment to determine when E&E assets are reclassified to PP&E. In making this determination, various factors are considered, including the existence of reserves, and whether the appropriate approvals have been received from regulatory bodies and the Company’s internal approval process.
Identification of Cash-Generating Units
CGUs are defined as the lowest level of integrated assets for which there are separately identifiable cash flows that are largely independent of cash flows from other assets or groups of assets. The classification of assets and allocation of corporate assets into CGUs requires significant judgment and interpretation. Factors considered in the classification include the integration between assets, shared infrastructures, the existence of common sales points, geography, geologic structure, and the manner in which Management monitors and makes decisions about its operations. The recoverability of the Company’s upstream, refining, crude-by-rail, railcars, storage tanks and corporate assets are assessed at the CGU level. As such, the determination of a CGU could have a significant impact on impairment losses and impairment reversals.
Assessment of Impairment Indicators or Impairment Reversals
PP&E, E&E assets and ROU assets are reviewed separately for indicators of impairment on a quarterly basis or when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Impairment losses recognized in prior periods, other than goodwill impairments, are assessed at each reporting date for any indicators that the impairment losses may no longer exist or may have decreased. The identification of indicators of impairment or reversal of impairment requires significant judgment.
B) Key Sources of Estimation Uncertainty
Critical accounting estimates are those estimates that require Management to make particularly subjective or complex judgments about matters that are inherently uncertain. Estimates and underlying assumptions are reviewed on an ongoing basis and any revisions to accounting estimates are recorded in the period in which the estimates are revised.
The evolving worldwide demand for energy and global advancement of alternative sources of energy that are not sourced from fossil fuels could change assumptions used to determine the recoverable amount of the Company’s PP&E and E&E assets and could affect the carrying value of those assets, may affect future development or viability of exploration prospects, may curtail the expected useful lives of oil and gas assets thereby accelerating depreciation charges and may accelerate decommissioning obligations increasing the present value of the associated provisions. The timing in which global energy markets transition from carbon-based sources to alternative energy is highly uncertain. Environmental considerations are built into estimates through the use of key assumptions used to estimate fair value including forward commodity prices, forward crack spreads and discount rates. The energy transition could impact the future prices of commodities. Pricing assumptions used in the determination of recoverable amounts incorporate market expectations and the evolving worldwide demand for energy.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 28 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Changes to assumptions could result in a material adjustment to the carrying amount of assets and liabilities within the next financial year. The following are the key assumptions about the future and other key sources of estimation at the end of the reporting period that, if changed, could result in a material adjustment to the carrying amount of assets and liabilities within the next financial year.
Crude Oil and Natural Gas Reserves
There are a number of inherent uncertainties associated with estimating crude oil and natural gas reserves. Reserves estimates are dependent upon variables including the expected future production volumes, future development and operating expenses, forward commodity prices, estimated royalty payments and taxes. Changes in these variables could significantly impact the reserves estimates which would affect the impairment test recoverable amount and DD&A expense of the Company’s crude oil and natural gas assets in the Oil Sands, Conventional and Offshore segments. The Company’s reserves are evaluated annually and reported to the Company by its IQREs.
Recoverable Amounts
Determining the recoverable amount of a CGU or an individual asset requires the use of estimates and assumptions, which are subject to change as new information becomes available. For the Company’s upstream assets, these estimates include quantity of reserves, expected production volumes, future development and operating expenses, forward commodity prices and discount rates. Recoverable amounts for the Company’s downstream assets use assumptions such as refined product production, forward crude oil prices, forward crack spreads, future operating expenses and capital expenditures and discount rates. Changes in assumptions used in determining the recoverable amount could affect the carrying value of the related assets.
Decommissioning Costs
Provisions are recorded for the future decommissioning and restoration of the Company’s upstream assets, refining assets and crude-by-rail terminal at the end of their economic lives. Management uses judgment to assess the existence of liabilities and estimate the future value. The actual cost of decommissioning and restoration is uncertain and cost estimates may change in response to numerous factors including changes in legal requirements, technological advances, inflation and the timing of expected decommissioning and restoration. In addition, Management determines the appropriate discount rate at the end of each reporting period. This discount rate, which is credit-adjusted, is used to determine the present value of the estimated future cash outflows required to settle the obligation and may change in response to numerous market factors.
Fair Value of Assets Acquired and Liabilities Assumed in a Business Combination
The fair value of assets acquired, liabilities assumed and assets given up in a business combination, including contingent consideration and goodwill, is estimated based on information available at the date of acquisition. Various valuation techniques are applied for measuring fair value including market comparable transactions and discounted cash flows. For the Company’s upstream assets, key assumptions in the discounted cash flow models used to estimate fair value include forward commodity prices, expected production volumes, quantity of reserves, discount rates, future development and operating expenses. Estimated production volumes and quantity of reserves for acquired oil and gas properties were developed by internal geology and engineering professionals and IQREs. For downstream assets, key assumptions used to estimate fair value include refined product production, forward crude oil prices, forward crack spreads, discount rates, operating expenses and future capital expenditures. Changes in these variables could significantly impact the carrying value of the net assets acquired.
Income Tax Provisions
The determination of the Company’s income and other tax liabilities requires interpretation of complex laws and regulations often involving multiple jurisdictions. There are usually a number of tax matters under review; therefore, income taxes are subject to measurement uncertainty.
Deferred income tax assets are recorded to the extent that it is probable that the deductible temporary differences will be recoverable in future periods. The recoverability assessment involves a significant amount of estimation including an evaluation of when the temporary differences will reverse, an analysis of the amount of future taxable earnings, the availability of cash flow to offset the tax assets when the reversal occurs and the application of tax laws. There are some transactions for which the ultimate tax determination is uncertain. To the extent that assumptions used in the recoverability assessment change, there may be a significant impact on the Consolidated Financial Statements of future periods.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 29 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 5. ACQUISITIONS |
|---|
A) BP-Husky Refining LLC
i) Summary of the Acquisition
On February 28, 2023, Cenovus acquired the remaining 50 percent interest in Toledo from bp (the “Toledo Acquisition”). The Toledo Acquisition provides Cenovus full ownership and operatorship of the refinery, and further integrates Cenovus’s heavy oil production and refining capabilities. Total consideration for the Toledo Acquisition was US$378 million (C$514 million) in cash, including cost of working capital.
The Toledo Acquisition was accounted for using the acquisition method pursuant to IFRS 3. Under the acquisition method, assets and liabilities are recorded at fair value 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 final purchase price allocation was based on Management’s best estimate of fair value and was retrospectively adjusted to reflect items identified with new information obtained between February 28, 2023, and December 31, 2023, about conditions that existed at the acquisition date. Changes to identifiable assets acquired and liabilities assumed includes increases to PP&E of $96 million, partially offset by decreases of $66 million to inventories, $3 million to other liabilities and $1 million to accounts payable and accrued liabilities. The impact to DD&A as a result of these measurement period adjustments was not material and prior quarters have not been restated to reflect the impact of the measurement period adjustments.
The following table summarizes the recognized amounts of assets acquired and liabilities assumed at the date of acquisition.
| As at | February 28, 2023 |
|---|---|
| 100 Percent of the Identifiable Assets Acquired and Liabilities Assumed | |
| Cash | 69 |
| Accounts Receivable and Accrued Revenues | 3 |
| Inventories | 387 |
| Property, Plant and Equipment | 770 |
| Right-of-Use Assets | 33 |
| Other Assets | 10 |
| Accounts Payable and Accrued Liabilities | (139) |
| Lease Liabilities | (33) |
| Decommissioning Liabilities | (5) |
| Other Liabilities | (73) |
| Total Identifiable Net Assets | 1,022 |
The fair value and gross contractual amount of acquired accounts receivable and accrued revenues was $3 million, all of which was collected.
iii) Goodwill
| As at | February 28, 2023 |
|---|---|
| Total Purchase Consideration | 514 |
| Fair Value of Pre-Existing 50 Percent Ownership Interest in Toledo | 508 |
| Fair Value of Identifiable Net Assets | (1,022) |
| Goodwill | — |
Fair Value of Pre-Existing 50 Percent Ownership Interest in BP-Husky Refining LLC
Prior to the Toledo Acquisition, Toledo was jointly controlled with bp and met the definition of a joint operation under IFRS 11. Subsequent to the Toledo Acquisition, Cenovus controls Toledo, as defined under IFRS 10, and, accordingly Toledo was consolidated. As required by IFRS 3, when an acquirer achieves control in stages, the previously held interest is re-measured to fair value at the acquisition date with any gain or loss recognized in net earnings (loss).
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 30 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
The acquisition-date fair value of the previously held interest was estimated to be $508 million and the net carrying value of Toledo assets was $554 million. Cenovus recognized a non-cash revaluation loss of $34 million ($23 million, after tax) on the re-measurement of its pre-existing interest in Toledo to fair value, net of $12 million in associated cumulative foreign currency translation adjustments.
iv) Transaction Costs
For the year ended December 31, 2023, transaction costs of $11 million (2022 – $9 million), were recognized in the Consolidated Statements of Earnings (Loss).
v) Revenue and Profit Contribution
The acquired business contributed revenues of $4.1 billion and a net loss of $85 million for the period from February 28, 2023, to December 31, 2023. On September 20, 2022, an incident occurred at the Toledo Refinery, resulting in the shutdown of the facility. The Toledo Refinery returned to full operations in June 2023. If the closing of the Toledo Acquisition had occurred on January 1, 2023, Cenovus’s consolidated pro forma revenues and net earnings for the year ended December 31, 2023, would be $52.2 billion and $4.0 billion, respectively. These amounts were calculated using results from the acquired business, adjusting them for:
•Additional DD&A that would be charged assuming the fair value adjustments to PP&E had applied from January 1, 2023.
•Additional accretion on the decommissioning liabilities if they had been assumed on January 1, 2023.
•The consequential tax effects.
This pro forma information is not necessarily indicative of the results that would be obtained if the Toledo Acquisition had actually occurred on January 1, 2023.
B) Sunrise Oil Sands Partnership
i) Summary of the Acquisition
On August 31, 2022, Cenovus closed a transaction with bp Canada to purchase the remaining 50 percent interest in SOSP, in northern Alberta (the “Sunrise Acquisition”). It provided Cenovus with full ownership and further enhanced Cenovus’s core strength in the oil sands. The Sunrise Acquisition was accounted for using the acquisition method pursuant to IFRS 3.
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 | 600 |
| Total Consideration | 1,034 |
Cenovus 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 specified threshold. The maximum cumulative variable payment is $600 million.
ii) Identifiable Assets Acquired and Liabilities Assumed
| 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 | 3,218 |
| Accounts Payable and Accrued Liabilities | (313) |
| Income Tax Payable | (39) |
| Decommissioning Liabilities | (48) |
| Deferred Income Tax Liabilities | (486) |
| Total Identifiable Net Assets | 2,593 |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 31 |
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
iii) Goodwill
| As at | August 31, 2022 |
|---|---|
| Total Purchase Consideration | 1,034 |
| Fair Value of Pre-Existing 50 Percent Ownership Interest in SOSP | 1,559 |
| Fair Value of Identifiable Net Assets | (2,593) |
| Goodwill | — |
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. Subsequent to the Sunrise Acquisition, Cenovus controls SOSP, as defined under IFRS 10 and, accordingly SOSP has been consolidated. The acquisition-date fair value of the previously held interest was estimated to be $1.6 billion. The net carrying value of the SOSP assets was $960 million, including previously recorded goodwill (see Note 23). As a result, Cenovus recognized a non-cash revaluation gain of $599 million ($457 million, after-tax) on the re-measurement of its pre-existing interest in SOSP to fair value.
iv) Transaction Costs
For the year ended December 31, 2022, transaction costs of $2 million were recognized in the Consolidated Statements of Earnings (Loss).
| 6. GENERAL AND ADMINISTRATIVE | | --- || For the years ended December 31, | 2023 | 2022 | | --- | --- | --- | | Salaries and Benefits | 249 | 204 | | Administrative and Other | 342 | 297 | | Stock-Based Compensation Expense (Recovery) (Note 32) | 97 | 373 | | Other Incentive Benefits Expense (Recovery) | — | (9) | | | 688 | 865 | | 7. FINANCE COSTS | | --- || For the years ended December 31, | 2023 | 2022 | | --- | --- | --- | | Interest Expense – Short-Term Borrowings and Long-Term Debt | 362 | 478 | | Net Premium (Discount) on Redemption of Long-Term Debt (1) | (84) | (29) | | Interest Expense – Lease Liabilities (Note 20) | 161 | 163 | | Unwinding of Discount on Decommissioning Liabilities (Note 27) | 220 | 176 | | Other | 32 | 37 | | | 691 | 825 | | Capitalized Interest | (20) | (5) | | | 671 | 820 |
(1)Includes the premium or discount on redemption, net of transaction costs and the amortization of associated fair value adjustments.
| 8. INTEGRATION, TRANSACTION AND OTHER COSTS | | --- || For the years ended December 31, | 2023 | 2022 | | --- | --- | --- | | Integration Costs (1) | 46 | 95 | | Transaction Costs (Note 5) | 11 | 11 | | Other (2) | 28 | — | | | 85 | 106 |
(1)For the year ended December 31, 2023, integration costs includes $46 million related to the Toledo Acquisition (2022 – $5 million related to the Toledo Acquisition and $90 million related to the Husky Arrangement).
(2)Includes costs related to modernizing and replacing certain information technology systems, optimizing business processes and standardizing data across the Company.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 32 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 9. FOREIGN EXCHANGE (GAIN) LOSS, NET | | --- || For the years ended December 31, | 2023 | 2022 | | --- | --- | --- | | Unrealized Foreign Exchange (Gain) Loss on Translation of: | | | | U.S. Dollar Debt Issued From Canada | (231) | 365 | | Other | 21 | — | | Unrealized Foreign Exchange (Gain) Loss | (210) | 365 | | Realized Foreign Exchange (Gain) Loss | 143 | (22) | | | (67) | 343 | | 10. DIVESTITURES | | --- |
A) 2023 Divestitures
There were no material divestitures in the year end December 31, 2023.
B) 2022 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 May 31, 2022, the Company completed the transfer of 12.5 percent of Cenovus’s working interest in the White Rose field and satellite extensions in the Atlantic region. 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. for proceeds of $110 million, with no gain or loss recognized as the investment was recorded at fair value prior to the sale.
On September 13, 2022, the Company closed the sales of 337 gas stations in the retail fuels business, 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).
| 11. IMPAIRMENT CHARGES AND REVERSALS |
|---|
At each reporting date, the Company assesses its CGUs for indicators of impairment or when facts and circumstances suggest that the carrying amount may exceed the recoverable amount. Impairment losses recognized in prior periods, other than goodwill impairments, are assessed at each reporting date for any indicators that the impairment losses may no longer exist or may have decreased. Goodwill is tested for impairment at least annually. For the purposes of impairment testing, goodwill is allocated to the CGU to which it relates.
A) Upstream Cash-Generating Units
i) 2023 Impairment Charges
The Company tested CGUs with associated goodwill for impairment as at December 31, 2023, and there were no impairments. No impairment indicators were identified for the remaining CGUs.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 33 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Key Assumptions
The recoverable amounts (Level 3) of Cenovus’s Oil Sands CGUs with associated goodwill that were tested for impairment were estimated using FVLCOD. Key assumptions used to estimate the present value of future net cash flows from reserves include expected production volumes, quantity of reserves, forward commodity prices, future development and operating expenses, all consistent with Cenovus’s IQREs, and discount rates. Fair values for producing properties were calculated based on discounted after-tax cash flows of proved and probable reserves using forward prices and cost estimates as at December 31, 2023. All reserves were evaluated as at December 31, 2023, by the Company’s IQREs.
Crude Oil, NGLs and Natural Gas Prices
The forward commodity prices as at December 31, 2023, used to determine future cash flows from crude oil, NGLs and natural gas reserves were:
| 2024 | 2025 | 2026 | 2027 | 2028 | Average Annual Increase Thereafter | ||
|---|---|---|---|---|---|---|---|
| West Texas Intermediate (“WTI”) (US$/bbl) (1) | 73.67 | 74.98 | 76.14 | 77.66 | 79.22 | 2.00 | % |
| Western Canadian Select at Hardisty (2) (C$/bbl) | 76.74 | 79.77 | 81.12 | 82.88 | 85.04 | 2.00 | % |
| Condensate at Edmonton (C$/bbl) | 96.79 | 98.75 | 100.71 | 102.72 | 104.78 | 2.00 | % |
| Alberta Energy Company Natural Gas (C$/Mcf) (3) | 2.20 | 3.37 | 4.05 | 4.13 | 4.21 | 2.00 | % |
(1)Barrel ("bbl").
(2)Western Canadian Select at Hardisty (“WCS”).
(3)One thousand cubic feet (“Mcf”).
Discount Rates
Discounted future cash flows were determined by applying a discount rate of 14 percent.
Sensitivities
A one percent increase in the discount rate or a five percent decrease in forward commodity price estimates would not impact the results of the impairment tests performed on CGUs with associated goodwill.
ii) 2022 Impairment Charges
The Company tested the CGUs with associated goodwill for impairment as at December 31, 2022, and there were no impairments. The Company also tested the Sunrise CGU for impairment due to a decline in near-term forward prices between the date of the Sunrise Acquisition and December 31, 2022. The recoverable amount of the Sunrise CGU was in excess of its carrying amount and no impairment was recorded.
Key Assumptions
The recoverable amounts (Level 3) of Cenovus’s Oil Sands CGUs that were tested for impairment were approximated using FVLCOD. The key assumptions used to estimate the present value of future net cash flows were consistent with those noted above for the year ended December 31, 2023. All reserves were evaluated as at December 31, 2022, by the Company's IQREs.
Crude Oil, NGLs and Natural Gas Prices
The forward commodity prices as at December 31, 2022, used to determine future cash flows from crude oil, NGLs and natural gas reserves were:
| 2023 | 2024 | 2025 | 2026 | 2027 | Average Annual Increase Thereafter | ||
|---|---|---|---|---|---|---|---|
| WTI (US$/bbl) | 80.33 | 78.50 | 76.95 | 77.61 | 79.16 | 2.00 | % |
| WCS (C$/bbl) | 76.54 | 77.75 | 77.55 | 80.07 | 81.89 | 2.00 | % |
| Condensate at Edmonton (C$/bbl) | 106.22 | 101.35 | 98.94 | 100.19 | 101.74 | 2.00 | % |
| Alberta Energy Company Natural Gas (C$/Mcf) | 4.23 | 4.40 | 4.21 | 4.27 | 4.34 | 2.00 | % |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 34 | ||||||
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Discount Rates
Discounted future cash flows are determined by applying a discount rate between 14 percent and 15 percent based on the individual characteristics of the CGU, and other economic and operating factors.
Sensitivities
For the Sunrise CGU, a one percent increase in the discount rate would result in an impairment of $69 million and a five percent decrease in forward commodity price estimates would result in an impairment of $226 million. A one percent increase in the discount rate or a five percent decrease in forward price estimates would not impact the result of the impairment tests performed on CGUs with associated goodwill.
B) Downstream Cash-Generating Units
i) 2023 Impairment Charges and Reversals
As at December 31, 2023, there were no indicators of impairment or impairment reversals for the Company's downstream CGUs.
ii) 2022 Impairment Charges and Reversals
As at December 31, 2022, the Company identified indicators of impairment for the Toledo CGU due to the pending acquisition of the remaining 50 percent from bp and an incident at the Toledo Refinery, and for the Superior CGU with the commissioning of the asset in preparation for restart. The total carrying amount of the Toledo and Superior CGUs was greater than the recoverable amount. An impairment charge of $1.5 billion was recorded as additional DD&A in the U.S. Refining segment.
As at December 31, 2022, there were also indicators of impairment reversals for the Company’s Borger, Wood River and Lima CGUs due to an increase in forward crack spreads, resulting in higher margins for refined products. An assessment indicated the recoverable amount was greater than the carrying value of the associated CGUs. As at December 31, 2022, the Company reversed impairment charges of $1.2 billion, net of DD&A that would have been recorded had no impairment been recorded.
As at December 31, 2022, the aggregate recoverable amount of the U.S. Refining CGUs was estimated to be $5.4 billion.
Key Assumptions
The recoverable amount (Level 3) of the U.S. Refining CGUs were determined using FVLCOD. FVLCOD was calculated based on discounted after-tax cash flows using forward prices and cost estimates. Key assumptions in the determination of future cash flows included refined product production, forward crude oil prices, forward crack spreads, future capital expenditures, future operating costs and discount rates. Forward crack spreads are based on an average of third-party consultant forecasts.
Crude Oil and Crack Spreads
Forward prices are based on Management’s best estimate and corroborated with third-party data. As at December 31, 2022, the forward prices used to determine future cash flows were:
| (US$/bbl) | 2023 | 2024 | 2025 | 2026 | 2027 |
|---|---|---|---|---|---|
| WTI | 80.33 | 78.50 | 76.95 | 77.61 | 79.16 |
| Differential WTI – WTS (1) | (0.56) | (0.56) | (0.56) | (0.56) | (0.56) |
| Differential WTI – WCS | (23.32) | (19.09) | (17.42) | (15.87) | (15.74) |
| Chicago 3-2-1 Crack Spread | 29.37 | 24.10 | 22.12 | 21.70 | 21.67 |
(1)West Texas Sour (“WTS”).
Subsequent prices were extrapolated using a two percent growth rate to determine future cash flows up to the year 2032.
Discount Rates
Discounted future cash flows were determined by applying a discount rate between 15 percent and 18 percent based on the individual characteristics of the CGU, and other economic and operating factors.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 35 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Sensitivities
The sensitivity analysis below shows the impact that a change in the discount rate or forward crude oil and crack spreads would have on the impairment amount and impairment reversal amount recorded as at December 31, 2022, for the U.S. Refining segment CGUs:
| One Percent Increase in<br><br>the Discount Rate | One Percent Decrease in<br><br>the Discount Rate | Five Percent Increase in the Forward Price Estimates | Five Percent Decrease in the Forward Price Estimates | |
|---|---|---|---|---|
| Increase (Decrease) to Impairment Amount | 69 | (65) | (268) | 268 |
| Increase (Decrease) to Impairment Reversal Amount | (72) | 14 | 168 | (342) |
| 12. OTHER INCOME (LOSS), NET | ||||
| --- |
For the year ended December 31, 2023, the Company recorded other income of $63 million (2022 – $532 million).
In 2022, other income included insurance proceeds of $328 million, related to the 2018 incidents at the Superior Refinery and in the Atlantic region, and $65 million under the Government of Alberta’s Site Rehabilitation Program, which provided qualifying entities funding to abandon and reclaim oil and gas sites. No similar amounts were recorded in 2023.
| 13. INCOME TAXES |
|---|
A) Income Tax Expense (Recovery)
| For the years ended December 31, | 2023 | 2022 |
|---|---|---|
| Current Tax | ||
| Canada | 1,041 | 1,252 |
| United States | (109) | 104 |
| Asia Pacific | 224 | 262 |
| Other International | 25 | 21 |
| Total Current Tax Expense (Recovery) | 1,181 | 1,639 |
| Deferred Tax Expense (Recovery) | (250) | 642 |
| 931 | 2,281 |
In December 2021, the Organization for Economic Co-operation and Development (“OECD”) issued model rules for a new global minimum tax framework (“Pillar Two”). In May 2023, the IASB issued amendments to IAS 12, “Income Taxes” (“IAS 12”) to address Pillar Two, which provide clarity on the impacts and additional disclosure requirements once legislation is substantively enacted. Cenovus has applied the mandatory temporary exemption of IAS 12 and in turn, has not recognized the impacts of Pillar Two in the deferred income tax calculation. The Company is not expecting a material impact as a result of Pillar Two.
For the year ended December 31, 2023, the Company recorded a current tax expense primarily related to taxable income arising in Canada and Asia Pacific. The decrease from the prior year is due to lower earnings compared to 2022 and a deferred income tax recovery in the U.S. of which $115 million related to a step-up in the U.S. tax basis on the Toledo Acquisition.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 36 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
The following table reconciles income taxes calculated at the Canadian statutory rate with the recorded income taxes:
| For the years ended December 31, | 2023 | 2022 |
|---|---|---|
| Earnings (Loss) Before Income Tax | 5,040 | 8,731 |
| Canadian Statutory Rate (percent) | 23.7 | 23.7 |
| Expected Income Tax Expense (Recovery) | 1,194 | 2,069 |
| Effect on Taxes Resulting From: | ||
| Statutory and Other Rate Differences | (38) | 17 |
| Non-Taxable Capital (Gains) Losses | (15) | 84 |
| Non-Recognition of Capital (Gains) Losses | (30) | 84 |
| Adjustments Arising From Prior Year Tax Filings | (16) | 15 |
| Recognition of U.S. Tax Basis | (115) | — |
| Other | (49) | 12 |
| Total Tax Expense (Recovery) | 931 | 2,281 |
| Effective Tax Rate (percent) | 18.5 | 26.1 |
B) Deferred Income Tax Assets and Liabilities
The breakdown of deferred income tax assets and deferred income tax liabilities, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:
| For the years ended December 31, | 2023 | 2022 |
|---|---|---|
| Deferred Income Tax Assets | ||
| Deferred Income Tax Assets to be Settled Within Twelve Months | (315) | (31) |
| Deferred Income Tax Assets to be Settled After More Than Twelve Months | (1,174) | (747) |
| (1,489) | (778) | |
| Deferred Income Tax Liabilities | ||
| Deferred Income Tax Liabilities to be Settled Within Twelve Months | 138 | 55 |
| Deferred Income Tax Liabilities to be Settled After More Than Twelve Months | 4,843 | 4,460 |
| 4,981 | 4,515 | |
| Net Deferred Income Tax Liability | 3,492 | 3,737 |
The deferred income tax assets and liabilities to be settled within twelve months represents Management’s estimate of the timing of the reversal of temporary differences and may not correlate to the current income tax expense of the subsequent year.
The movement in deferred income tax assets and liabilities, without taking into consideration the offsetting of balances within the same tax jurisdiction, is:
| Deferred Income Tax Assets | Unused Tax Losses | Risk Management | Other | Total |
|---|---|---|---|---|
| As at December 31, 2021 | (655) | (11) | (788) | (1,454) |
| Charged (Credited) to Earnings | 490 | 11 | 158 | 659 |
| Charged (Credited) to Other Comprehensive Income | 9 | — | 8 | 17 |
| As at December 31, 2022 | (156) | — | (622) | (778) |
| Charged (Credited) to Earnings | (777) | — | 54 | (723) |
| Charged (Credited) to Other Comprehensive Income | 19 | — | (7) | 12 |
| As at December 31, 2023 | (914) | — | (575) | (1,489) |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 37 | |||
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| Deferred Income Tax Liabilities | PP&E | Risk Management | Other | Total | |||
|---|---|---|---|---|---|---|---|
| As at December 31, 2021 | 3,949 | — | 97 | 4,046 | |||
| Charged (Credited) to Earnings | 25 | 11 | (53) | (17) | |||
| Charged (Credited) to Sunrise Purchase Price Allocation | 486 | — | — | 486 | |||
| As at December 31, 2022 | 4,460 | 11 | 44 | 4,515 | |||
| Charged (Credited) to Earnings | 495 | (8) | (14) | 473 | |||
| Charged (Credited) to Other Comprehensive Income | (7) | — | — | (7) | |||
| As at December 31, 2023 | 4,948 | 3 | 30 | 4,981 | Net Deferred Income Tax Liabilities | Total | |
| --- | --- | ||||||
| As at December 31, 2021 | 2,592 | ||||||
| Charged (Credited) to Earnings | 642 | ||||||
| Charged (Credited) to Sunrise Purchase Price Allocation | 486 | ||||||
| Charged (Credited) to Other Comprehensive Income | 17 | ||||||
| As at December 31, 2022 | 3,737 | ||||||
| Charged (Credited) to Earnings | (250) | ||||||
| Charged (Credited) to Other Comprehensive Income | 5 | ||||||
| As at December 31, 2023 | 3,492 |
The deferred income tax asset of $696 million as at December 31, 2023 (December 31, 2022 – $546 million) represents net deductible temporary differences in the U.S. jurisdiction, which have been fully recognized, as the probability of realization is expected due to forecasted taxable income. No deferred tax liability was recognized as at December 31, 2023, or December 31, 2022, on temporary differences associated with investments in subsidiaries and joint arrangements where the Company can control the timing of the reversal of the temporary difference and the reversal is not probable in the foreseeable future.
C) Tax Pools
The approximate amounts of tax pools available, including tax losses, are:
| As at December 31, | 2023 | 2022 |
|---|---|---|
| Canada | 8,547 | 8,505 |
| United States | 8,058 | 6,477 |
| Asia Pacific | 347 | 457 |
| 16,952 | 15,439 |
As at December 31, 2023, the above tax pools included $126 million (December 31, 2022 – $115 million) of Canadian federal non-capital losses and $3.7 billion (December 31, 2022 – $468 million) of U.S. net operating losses. These losses expire no earlier than 2038.
As at December 31, 2023, the Company had Canadian net capital losses totaling $59 million (December 31, 2022 – $28 million), which are available for carry forward to reduce future capital gains. The Company has not recognized $141 million (December 31, 2022 – $504 million) of deductible temporary differences associated with unrealized foreign exchange losses on its U.S. denominated debt.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 38 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 14. PER SHARE AMOUNTS |
|---|
A) Net Earnings (Loss) Per Common Share – Basic and Diluted
| For the years ended December 31, | 2023 | 2022 |
|---|---|---|
| Net Earnings (Loss) | 4,109 | 6,450 |
| Effect of Cumulative Dividends on Preferred Shares | (36) | (35) |
| Net Earnings (Loss) – Basic and Diluted | 4,073 | 6,415 |
| Basic – Weighted Average Number of Shares (thousands) | 1,895,487 | 1,951,262 |
| Dilutive Effect of Warrants | 22,223 | 44,845 |
| Dilutive Effect of Net Settlement Rights | 7,150 | 10,045 |
| Dilutive Effect of Cenovus Replacement Stock Options | 580 | — |
| Diluted – Weighted Average Number of Shares (thousands) | 1,925,440 | 2,006,152 |
| Net Earnings (Loss) Per Common Share – Basic ($) | 2.15 | 3.29 |
| Net Earnings (Loss) Per Common Share – Diluted (1) (2) ($) | 2.12 | 3.20 |
(1)For the year ended December 31, 2023, net earnings of $nil (2022 – $52 million) and no common shares (2022 – 1.6 million) related to the assumed exercise of the Cenovus replacement stock options were excluded from the calculation of dilutive net earnings (loss) per share as the effect was anti-dilutive.
(2)For the year ended December 31, 2023, 1.5 million NSRs (2022 – 52 thousand) were excluded from the calculation of diluted weighted average number of shares as the effect was anti-dilutive.
B) Common Share Dividends
| 2023 | 2022 | |||
|---|---|---|---|---|
| For the years ended December 31, | Per Share | Amount | Per Share | Amount |
| Base Dividends | 0.525 | 990 | 0.350 | 682 |
| Variable Dividends | — | — | 0.114 | 219 |
| Total Common Share Dividends Declared and Paid | 0.525 | 990 | 0.464 | 901 |
The declaration of common share dividends is at the sole discretion of the Company’s Board of Directors and is considered quarterly.
On February 14, 2024, the Company’s Board of Directors declared a first quarter base dividend of $0.140 per common share, payable on March 28, 2024, to common shareholders of record as at March 15, 2024.
C) Preferred Share Dividends
| For the years ended December 31, | 2023 | 2022 |
|---|---|---|
| Series 1 First Preferred Shares | 7 | 7 |
| Series 2 First Preferred Shares | 2 | 1 |
| Series 3 First Preferred Shares | 12 | 12 |
| Series 5 First Preferred Shares | 9 | 9 |
| Series 7 First Preferred Shares | 6 | 6 |
| Total Preferred Share Dividends Declared | 36 | 35 |
The declaration of preferred share dividends is at the sole discretion of the Company’s Board of Directors and is considered quarterly.
For the year ended December 31, 2023, the Company paid $36 million in preferred share dividends (December 31, 2022 – $26 million).
On January 2, 2024, the Company paid preferred share dividends of $9 million, as declared on November 1, 2023. On January 3, 2023, the Company paid preferred share dividends of $9 million, as declared on November 1, 2022.
On February 14, 2024, the Company’s Board of Directors declared first quarter dividends of $9 million payable on April 1, 2024, to preferred shareholders of record as at March 15, 2024.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 39 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 15. CASH AND CASH EQUIVALENTS | | --- || As at December 31, | 2023 | 2022 | | --- | --- | --- | | Cash | 2,109 | 3,195 | | Short-Term Investments | 118 | 1,329 | | | 2,227 | 4,524 | | 16. ACCOUNTS RECEIVABLE AND ACCRUED REVENUES | | --- || As at December 31, | 2023 | 2022 | | --- | --- | --- | | Trade and Accruals | 2,722 | 2,962 | | Prepaids and Deposits | 242 | 402 | | Joint Operations Receivables | 49 | 51 | | Other | 22 | 58 | | | 3,035 | 3,473 | | 17. INVENTORIES | | --- || As at December 31, | 2023 | 2022 | | --- | --- | --- | | Product | | | | Crude Oil | 2,084 | 2,424 | | Diluent | 379 | 366 | | Natural Gas and NGLs | 68 | 50 | | Refined Products | 1,073 | 1,169 | | Total Product | 3,604 | 4,009 | | Parts and Supplies | 426 | 303 | | | 4,030 | 4,312 |
For the year ended December 31, 2023, approximately $39.1 billion of produced and purchased inventory was recorded as an expense (2022 – approximately $49.1 billion).
As at December 31, 2023, the Company recorded non-cash inventory write-downs of $86 million and $3 million in refined products and crude oil inventory, respectively. The non-cash inventory write-downs were included in purchased product expense.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 40 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 18. EXPLORATION AND EVALUATION ASSETS, NET | | --- || | Total | | --- | --- | | As at December 31, 2021 | 720 | | Additions | 37 | | Write-downs (1) | (64) | | Change in Decommissioning Liabilities | (12) | | Exchange Rate Movements and Other | 4 | | As at December 31, 2022 | 685 | | Acquisition | 31 | | Additions | 84 | | Transfer to PP&E (Note 19) | (60) | | Write-downs (1) | (29) | | Change in Decommissioning Liabilities | 28 | | Exchange Rate Movements and Other | (1) | | As at December 31, 2023 | 738 |
(1)For the year ended December 31, 2023, previously capitalized E&E costs of $14 million, $6 million and $9 million in the Oil Sands, Conventional and Offshore segments, respectively, were written off as exploration expense (2022 – $2 million and $62 million in the Oil Sands and Offshore segments, respectively), as the carrying value was not considered to be recoverable.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 41 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 19. PROPERTY, PLANT AND EQUIPMENT, NET | | --- || | Crude Oil and Natural Gas Properties | Processing, Transportation and Storage Assets | Refining Assets | Other Assets (1) | Total | | --- | --- | --- | --- | --- | --- | | COST | | | | | | | As at December 31, 2021 | 38,443 | 228 | 10,495 | 1,735 | 50,901 | | Acquisitions (Note 5) (2) | 3,230 | — | — | — | 3,230 | | Additions | 2,409 | 11 | 1,143 | 108 | 3,671 | | Change in Decommissioning Liabilities | (186) | (6) | (29) | (32) | (253) | | Divestitures (Notes 5 and 10) (2) | (557) | — | — | — | (557) | | Exchange Rate Movements and Other | 189 | 21 | 523 | 14 | 747 | | As at December 31, 2022 | 43,528 | 254 | 12,132 | 1,825 | 57,739 | | Acquisitions (Note 5) (3) | 11 | — | 770 | — | 781 | | Additions | 3,392 | 14 | 719 | 89 | 4,214 | | Transfer from E&E (Note 18) | 60 | — | — | — | 60 | | Change in Decommissioning Liabilities | 542 | — | 21 | 18 | 581 | | Divestitures (Note 5) (3) | (17) | — | (633) | (17) | (667) | | Exchange Rate Movements and Other | (91) | 4 | (239) | (7) | (333) | | As at December 31, 2023 | 47,425 | 272 | 12,770 | 1,908 | 62,375 | | ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION | | | | | | | As at December 31, 2021 | 10,912 | 53 | 4,572 | 1,139 | 16,676 | | Depreciation, Depletion and Amortization (4) | 3,461 | 37 | 466 | 103 | 4,067 | | Impairment Charges (Note 11) | — | — | 1,499 | — | 1,499 | | Impairment Reversals (Note 11) | — | — | (1,233) | — | (1,233) | | Divestitures (Notes 5 and 10) (2) | (84) | — | — | — | (84) | | Exchange Rate Movements and Other | 13 | 16 | 243 | 43 | 315 | | As at December 31, 2022 | 14,302 | 106 | 5,547 | 1,285 | 21,240 | | Depreciation, Depletion and Amortization (4) | 3,692 | 19 | 554 | 86 | 4,351 | | Divestitures (Note 5) (3) | (8) | — | (299) | (12) | (319) | | Exchange Rate Movements and Other | (11) | 4 | (135) | (5) | (147) | | As at December 31, 2023 | 17,975 | 129 | 5,667 | 1,354 | 25,125 | | CARRYING VALUE | | | | | | | As at December 31, 2022 | 29,226 | 148 | 6,585 | 540 | 36,499 | | As at December 31, 2023 | 29,450 | 143 | 7,103 | 554 | 37,250 |
(1)Includes assets within the commercial fuels business, 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. As at August 31, 2022, the carrying value of the pre-existing interest in SOSP’s PP&E was $454 million.
(3)In connection with the Toledo 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 February 28, 2023, the carrying value of the pre-existing interest in Toledo’s PP&E was $334 million.
(4)For the year ended December 31, 2023, DD&A includes asset write-downs of $20 million, $12 million and $38 million in the Oil Sands, Canadian Refining and U.S. Refining segments, respectively, (2022 – $26 million and $25 million in the Offshore and Canadian Refining segments, respectively).
Assets Under Construction
PP&E includes the following amounts in respect of assets under construction that are not subject to DD&A:
| As at December 31, | 2023 | 2022 |
|---|---|---|
| Crude Oil and Natural Gas Properties | 2,507 | 2,142 |
| Refining Assets | 243 | 137 |
| 2,750 | 2,279 | |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 42 | |
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 20. LEASES |
|---|
A) Right-of-Use Assets, Net
| Real Estate | Transportation and Storage Assets (1) | Refining Assets | Other Assets (2) | Total | |
|---|---|---|---|---|---|
| COST | |||||
| As at December 31, 2021 | 592 | 1,841 | 161 | 62 | 2,656 |
| Additions | — | 22 | 1 | 2 | 25 |
| Exchange Rate Movements and Other | 7 | (23) | 12 | 10 | 6 |
| As at December 31, 2022 | 599 | 1,840 | 174 | 74 | 2,687 |
| Acquisitions (Note 5) (3) | 1 | 24 | 8 | — | 33 |
| Additions | 1 | 56 | — | — | 57 |
| Divestitures (Note 5) (3) | — | — | (19) | — | (19) |
| Exchange Rate Movements and Other | (13) | 44 | (2) | (4) | 25 |
| As at December 31, 2023 | 588 | 1,964 | 161 | 70 | 2,783 |
| ACCUMULATED DEPRECIATION | |||||
| As at December 31, 2021 | 92 | 520 | 33 | 1 | 646 |
| Depreciation | 36 | 226 | 21 | 14 | 297 |
| Exchange Rate Movements and Other | (1) | (101) | 4 | (3) | (101) |
| As at December 31, 2022 | 127 | 645 | 58 | 12 | 842 |
| Depreciation | 36 | 223 | 22 | 12 | 293 |
| Divestitures (Note 5) (3) | — | — | (12) | — | (12) |
| Exchange Rate Movements and Other | (7) | (5) | (3) | (5) | (20) |
| As at December 31, 2023 | 156 | 863 | 65 | 19 | 1,103 |
| CARRYING VALUE | |||||
| As at December 31, 2022 | 472 | 1,195 | 116 | 62 | 1,845 |
| As at December 31, 2023 | 432 | 1,101 | 96 | 51 | 1,680 |
(1)Includes railcars, barges, vessels, pipelines, caverns and storage tanks.
(2)Includes assets in the commercial fuels business, fleet vehicles and other equipment.
(3)In connection with the Toledo 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 February 28, 2023, the carrying value of the pre-existing interest in Toledo’s ROU assets was $7 million.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 43 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
B) Lease Liabilities
| 2023 | 2022 | |
|---|---|---|
| Lease Liabilities, Beginning of Year | 2,836 | 2,957 |
| Acquisitions (Note 5) (1) | 33 | — |
| Additions | 57 | 25 |
| Interest Expense (Note 7) | 161 | 163 |
| Lease Payments | (449) | (465) |
| Divestitures (Note 5) (1) | (11) | — |
| Exchange Rate Movements and Other | 31 | 156 |
| Lease Liabilities, End of Year | 2,658 | 2,836 |
| Less: Current Portion | 299 | 308 |
| Long-Term Portion | 2,359 | 2,528 |
(1)In connection with the Toledo 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 February 28, 2023, the carrying value of the pre-existing interest in Toledo’s lease liabilities was $11 million.
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.
The Company includes extension options in the calculation of lease liabilities when 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. JOINT ARRANGEMENTS |
|---|
A) Joint Operations
Cenovus has a number of joint operations in the Upstream segments. At December 31, 2023, the Company also has a 50 percent interest in WRB in the U.S. Refining segment. Phillips 66 holds the remaining 50 percent interest and is the operator of the Wood River Refinery in Illinois and the Borger Refinery in Texas.
Prior to February 28, 2023, Cenovus held a 50 percent interest in Toledo, which was jointly controlled with bp. Prior to August 31, 2022, Cenovus held a 50 percent interest in SOSP, which was jointly controlled with bp Canada. Subsequent to these dates, both of these joint operations are fully controlled by Cenovus and have been consolidated, refer to Note 5 for more information on these transactions.
B) Joint Ventures
Husky-CNOOC Madura Ltd.
The Company holds a 40 percent interest in the jointly controlled entity HCML. The Company’s share of equity investment income (loss) related to the joint venture, distributions received and contributions paid are recorded in (income) loss from equity-accounted affiliates.
Summarized below is the financial information for HCML accounted for using the equity method.
Results of Operations
| For the years ended December 31, | 2023 | 2022 |
|---|---|---|
| Revenue | 615 | 383 |
| Expenses | 545 | 350 |
| Net Earnings (Loss) | 70 | 33 |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 44 | |
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Balance Sheet
| As at December 31, | 2023 | 2022 |
|---|---|---|
| Current Assets (1) | 334 | 247 |
| Non-Current Assets | 1,751 | 1,926 |
| Current Liabilities | 140 | 160 |
| Non-Current Liabilities | 1,188 | 1,293 |
| Net Assets | 757 | 720 |
(1)Includes cash and cash equivalents of $111 million (December 31, 2022 – $64 million).
For the year ended December 31, 2023, the Company’s share of income from the equity-accounted affiliate was $57 million (2022 – $23 million). As at December 31, 2023, the carrying amount of the Company’s share of net assets was $344 million (December 31, 2022 – $365 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 year ended December 31, 2023, the Company received $93 million of distributions from HCML (2022 – $42 million) and paid $35 million in contributions (2022 – $54 million).
Husky Midstream Limited Partnership
The Company jointly owns and is the operator of HMLP. The Company holds a 35 percent interest in HMLP and applies the equity method of accounting. The Company’s share of equity investment income related to the joint venture, in excess of cumulated unrecognized losses, distributions received and contributions paid, is recorded in (income) loss from equity-accounted affiliates.
| For the years ended December 31, | 2023 | 2022 |
|---|---|---|
| HMLP Net Earnings (Loss) | 231 | 190 |
| Cenovus's Share of HMLP Net Earnings (Loss) (1) | (1) | (23) |
| Cenovus's Share of HMLP Other Comprehensive Income (Loss) (1) | (2) | 8 |
| Distributions Received | 56 | 23 |
| Contributions Paid | 62 | 31 |
(1)Cenovus does not receive 35 percent of HMLP's net earnings and OCI due to the nature of the profit sharing agreement.
The carrying value of the Company’s investment in HMLP as at December 31, 2023, was $nil (December 31, 2022 – $nil) due to losses in excess of the equity investment. Cenovus had unrecognized cumulative losses from earnings and OCI, net of tax, of $31 million as at December 31, 2023 (December 31, 2022 – $28 million).
| 22. OTHER ASSETS | | --- || As at December 31, | 2023 | 2022 | | --- | --- | --- | | Private Equity Investments (Note 35) | 131 | 55 | | Precious Metals | 76 | 86 | | Net Investment in Finance Leases | 61 | 62 | | Long-Term Receivables and Prepaids | 50 | 120 | | Intangible Assets (1) | — | 19 | | | 318 | 342 |
(1) For the year ended December 31, 2022, $49 million of previously capitalized intangible asset costs were written off as DD&A in the Oil Sands segment as the carrying value was not considered to be recoverable.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 45 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 23. GOODWILL | | --- || | 2023 | 2022 | | --- | --- | --- | | Carrying Value, Beginning of Year | 2,923 | 3,473 | | Goodwill Disposed (Note 5) | — | (550) | | Carrying Value, End of Year | 2,923 | 2,923 |
The carrying amount of goodwill is allocated to the following CGUs:
| As at December 31, | 2023 | 2022 | ||
|---|---|---|---|---|
| Primrose (Foster Creek) | 1,171 | 1,171 | ||
| Christina Lake | 1,101 | 1,101 | ||
| Lloydminster Thermal | 651 | 651 | ||
| 2,923 | 2,923 | |||
| 24. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES | ||||
| --- | As at December 31, | 2023 | 2022 | |
| --- | --- | --- | ||
| Accruals | 3,931 | 3,412 | ||
| Trade | 1,075 | 2,331 | ||
| Employee Long-Term Incentives | 284 | 162 | ||
| Interest | 69 | 80 | ||
| Joint Operations Payable | 75 | 66 | ||
| Risk Management | 19 | 39 | ||
| Provisions for Onerous and Unfavourable Contracts | 18 | 25 | ||
| Other | 9 | 9 | ||
| 5,480 | 6,124 | |||
| 25. DEBT AND CAPITAL STRUCTURE | ||||
| --- |
For the year ended December 31, 2023, the annualized weighted average interest rate on outstanding debt, including the Company’s proportionate share of short-term borrowings, was 4.7 percent (2022 – 4.7 percent).
A) Short-Term Borrowings
| As at December 31, | Notes | 2023 | 2022 |
|---|---|---|---|
| Uncommitted Demand Facilities | i | — | — |
| WRB Uncommitted Demand Facilities | ii | 179 | 115 |
| Total Debt Principal | 179 | 115 |
i) Uncommitted Demand Facilities
As at December 31, 2023, the Company had uncommitted demand facilities of $1.7 billion (December 31, 2022 – $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 December 31, 2023, there were outstanding letters of credit aggregating to $364 million (December 31, 2022 – $490 million) and no direct borrowings.
ii) WRB Uncommitted Demand Facilities
WRB has uncommitted demand facilities of US$450 million that may be used to cover short-term working capital requirements, of which Cenovus’s proportionate share is 50 percent. As at December 31, 2023, US$270 million was drawn on these facilities, of which Cenovus’s proportionate share was US$135 million (C$179 million). As at December 31, 2022, Cenovus’s proportionate share of the capacity was US$225 million and US$85 million (C$115 million) of this capacity was drawn.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 46 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
B) Long-Term Debt
| As at December 31, | Notes | 2023 | 2022 |
|---|---|---|---|
| Committed Credit Facility (1) | i | — | — |
| U.S. Dollar Denominated Unsecured Notes | ii | 5,028 | 6,537 |
| Canadian Dollar Unsecured Notes | ii | 2,000 | 2,000 |
| Total Debt Principal | 7,028 | 8,537 | |
| Debt Premiums (Discounts), Net, and Transaction Costs | 80 | 154 | |
| Long-Term Debt | 7,108 | 8,691 |
(1)The committed credit facility may include Bankers’ Acceptances, secured overnight financing rate loans, prime rate loans and U.S. base rate loans.
i) Committed Credit Facility
As at December 31, 2023, the Company had in place a committed credit facility that consists of a $1.8 billion tranche maturing on November 10, 2025, and a $3.7 billion tranche maturing on November 10, 2026. As at December 31, 2023, no amount was drawn on the credit facility (December 31, 2022 – $nil).
ii) U.S. Dollar Denominated and Canadian Dollar Denominated Unsecured Notes
For the year ended December 31, 2023, the Company purchased US$1.0 billion (2022 – US$2.6 billion and C$750 million) in principal of its outstanding unsecured notes.
The principal amounts of the Company’s outstanding unsecured notes are:
| 2023 | 2022 | |||
|---|---|---|---|---|
| As at December 31, | US$ Principal | C$ Principal and Equivalent | US$ Principal | C$ Principal and Equivalent |
| U.S. Dollar Denominated Unsecured Notes | ||||
| 5.38% due July 15, 2025 | 133 | 176 | 133 | 181 |
| 4.25% due April 15, 2027 | 373 | 493 | 373 | 505 |
| 4.40% due April 15, 2029 | 183 | 241 | 240 | 324 |
| 2.65% due January 15, 2032 | 500 | 661 | 500 | 677 |
| 5.25% due June 15, 2037 | 333 | 441 | 583 | 790 |
| 6.80% due September 15, 2037 | 191 | 253 | 387 | 524 |
| 6.75% due November 15, 2039 | 652 | 862 | 935 | 1,267 |
| 4.45% due September 15, 2042 | 91 | 121 | 97 | 131 |
| 5.20% due September 15, 2043 | 27 | 36 | 29 | 39 |
| 5.40% due June 15, 2047 | 569 | 752 | 800 | 1,083 |
| 3.75% due February 15, 2052 | 750 | 992 | 750 | 1,016 |
| 3,802 | 5,028 | 4,827 | 6,537 | |
| Canadian Dollar Unsecured Notes | ||||
| 3.60% due March 10, 2027 | 750 | 750 | ||
| 3.50% due February 7, 2028 | 1,250 | 1,250 | ||
| 2,000 | 2,000 | |||
| Total Unsecured Notes | 7,028 | 8,537 |
As at December 31, 2023, 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 agreement, not to exceed 65 percent. The Company is well below this limit.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 47 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
C) Mandatory Debt Payments
| U.S. Dollar<br>Unsecured Notes | Canadian Dollar Unsecured Notes | Total | ||
|---|---|---|---|---|
| As at December 31, 2023 | US$ Principal | C$ Principal Equivalent | C$ Principal | C$ Principal and Equivalent |
| 2024 | — | — | — | — |
| 2025 | 133 | 176 | — | 176 |
| 2026 | — | — | — | — |
| 2027 | 373 | 493 | 750 | 1,243 |
| 2028 | — | — | 1,250 | 1,250 |
| Thereafter | 3,296 | 4,359 | — | 4,359 |
| 3,802 | 5,028 | 2,000 | 7,028 |
D) 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. Net Debt is used in managing the Company’s capital structure. 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, 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.
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.
On November 3, 2023, Cenovus filed a base shelf prospectus that allows the Company to offer, from time to time, debt securities, common shares, preferred shares, subscription receipts, warrants, share purchase contracts and units in Canada, the U.S. and elsewhere as permitted by law. The base shelf prospectus will expire in December 2025. Offerings under the base shelf prospectus are subject to market conditions on terms set forth in one or more prospectus supplements.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 48 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Net Debt to Adjusted EBITDA
| As at December 31, | 2023 | 2022 |
|---|---|---|
| Short-Term Borrowings | 179 | 115 |
| Current Portion of Long-Term Debt | — | — |
| Long-Term Portion of Long-Term Debt | 7,108 | 8,691 |
| Total Debt | 7,287 | 8,806 |
| Less: Cash and Cash Equivalents | (2,227) | (4,524) |
| Net Debt | 5,060 | 4,282 |
| Net Earnings (Loss) | 4,109 | 6,450 |
| Add (Deduct): | ||
| Finance Costs | 671 | 820 |
| Interest Income | (133) | (81) |
| Income Tax Expense (Recovery) | 931 | 2,281 |
| Depreciation, Depletion and Amortization | 4,644 | 4,679 |
| Exploration and Evaluation Asset Write-downs | 29 | 64 |
| (Income) Loss From Equity-Accounted Affiliates | (51) | (15) |
| Unrealized (Gain) Loss on Risk Management | 52 | (126) |
| Foreign Exchange (Gain) Loss, Net | (67) | 343 |
| Revaluation (Gain) Loss | 34 | (549) |
| Re-measurement of Contingent Payments | 59 | 162 |
| (Gain) Loss on Divestiture of Assets | (14) | (269) |
| Other (Income) Loss, Net | (63) | (532) |
| Adjusted EBITDA (1) | 10,201 | 13,227 |
| Net Debt to Adjusted EBITDA (times) | 0.5 | 0.3 |
(1)Calculated on a trailing twelve-month basis.
Net Debt to Adjusted Funds Flow
| As at December 31, | 2023 | 2022 |
|---|---|---|
| Net Debt | 5,060 | 4,282 |
| Cash From (Used in) Operating Activities | 7,388 | 11,403 |
| (Add) Deduct: | ||
| Settlement of Decommissioning Liabilities | (222) | (150) |
| Net Change in Non-Cash Working Capital | (1,193) | 575 |
| Adjusted Funds Flow (1) | 8,803 | 10,978 |
| Net Debt to Adjusted Funds Flow (times) | 0.6 | 0.4 |
(1)Calculated on a trailing twelve-month basis.
Net Debt to Capitalization
| As at December 31, | 2023 | 2022 |
|---|---|---|
| Net Debt | 5,060 | 4,282 |
| Shareholders’ Equity | 28,698 | 27,576 |
| Capitalization | 33,758 | 31,858 |
| Net Debt to Capitalization (percent) | 15 | 13 |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 49 | |
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 26. CONTINGENT PAYMENTS |
|---|
A) Sunrise Oil Sands Partnership
In connection with the Sunrise Acquisition, Cenovus agreed to make quarterly variable payments, up to $600 million, from SOSP to bp Canada for up to eight quarters subsequent to August 31, 2022, when the average WCS price in a quarter exceeds $52.00 per barrel. The quarterly payment is 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 payment over the remaining term of the contract is $194 million.
The variable payment will be re-measured to fair value at each reporting date, with changes in fair value recorded to re-measurement of contingent payments.
In the year ended December 31, 2023, payments totaled $299 million for the quarterly payment periods ending November 30, 2022, February 28, 2023, May 31, 2023, and August 31, 2023.
| 2023 | 2022 | |
|---|---|---|
| Contingent Payments, Beginning of Year | 419 | — |
| Initial Recognition | — | 600 |
| Liabilities Settled or Payable | (314) | (92) |
| Re-measurement | 59 | (89) |
| Contingent Payments, End of Year | 164 | 419 |
| Less: Current Portion | 164 | 263 |
| Long-Term Portion | — | 156 |
B) FCCL Partnership
On May 17, 2022, the contingent payment obligation associated with the acquisition of 50 percent interest in the FCCL Partnership from ConocoPhillips Company and certain of its subsidiaries ended. The final payment of $177 million was made in July 2022.
| 2022 | ||||
|---|---|---|---|---|
| Contingent Payments, Beginning of Year | 236 | |||
| Re-measurement | 251 | |||
| Liabilities Settled | (487) | |||
| Contingent Payments, End of Year | — | |||
| 27. DECOMMISSIONING LIABILITIES | ||||
| --- | 2023 | 2022 | ||
| --- | --- | --- | ||
| Decommissioning Liabilities, Beginning of Year | 3,559 | 3,906 | ||
| Liabilities Incurred | 14 | 22 | ||
| Liabilities Acquired (Note 5) (1) (2) | 5 | 48 | ||
| Liabilities Settled | (221) | (215) | ||
| Liabilities Divested (Note 5) (1) (2) | (5) | (89) | ||
| Change in Estimated Future Cash Flows | 330 | 693 | ||
| Change in Discount Rates | 265 | (980) | ||
| Unwinding of Discount on Decommissioning Liabilities (Note 7) | 220 | 176 | ||
| Exchange Rate Movements and Other | (12) | (2) | ||
| Decommissioning Liabilities, End of Year | 4,155 | 3,559 |
(1)In connection with the Toledo 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 February 28, 2023, the carrying value of the pre-existing interest in Toledo’s decommissioning liabilities was $2 million.
(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. As at August 31, 2022, the carrying value of the pre-existing interest in SOSP’s decommissioning liabilities was $11 million.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 50 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
As at December 31, 2023, the undiscounted amount of estimated future cash flows required to settle the obligation is $15.0 billion (December 31, 2022 – $14.2 billion). Most of these obligations are not expected to be paid for several years, or decades, and are expected to be funded from general resources at that time. The Company expects to settle approximately $259 million of decommissioning liabilities over the next year. Revisions in estimated future cash flows resulted from a change in the timing of decommissioning liabilities over the estimated life of the reserves and an increase in cost estimates. These obligations were discounted using a credit-adjusted risk-free rate of 5.5 percent (December 31, 2022 – 6.1 percent) and assumes an inflation rate of two percent (December 31, 2022 – 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 December 31, 2023, the Company had $211 million in restricted cash (December 31, 2022 – $209 million).
Sensitivities
Changes to the credit-adjusted risk-free rate or the inflation rate would have the following impact on the decommissioning liabilities:
| Sensitivity | 2023 | 2022 | |||
|---|---|---|---|---|---|
| As at December 31, | Range | Increase | Decrease | Increase | Decrease |
| Credit-Adjusted Risk-Free Rate | ± one percent | (387) | 515 | (319) | 419 |
| Inflation Rate | ± one percent | 519 | (392) | 419 | (320) |
| 28. OTHER LIABILITIES | |||||
| --- | As at December 31, | 2023 | 2022 | ||
| --- | --- | --- | |||
| Renewable Volume Obligation, Net (1) | 397 | 101 | |||
| Pension and Other Post-Employment Benefit Plan | 276 | 201 | |||
| Provision for West White Rose Expansion Project (2) | 156 | 204 | |||
| Provisions for Onerous and Unfavourable Contracts | 72 | 95 | |||
| Employee Long-Term Incentives | 100 | 245 | |||
| Drilling Provisions | 25 | 31 | |||
| Deferred Revenue | — | 45 | |||
| Other | 157 | 120 | |||
| 1,183 | 1,042 |
(1)The gross amounts of the RVO and RINs asset were $785 million and $388 million, respectively (December 31, 2022 – $1.1 billion and $1.0 billion, respectively).
(2)Cenovus expects to draw down the provision by $73 million in the next 12 months.
| 29. PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS |
|---|
The Company provides the majority of employees with a defined contribution pension plan (“DC Pension Plan”). The Company also provides OPEB plans to retirees and sponsors defined benefit pension plans in Canada and the U.S. (together, the “DB Pension Plan”).
The DB Pension Plan provides pension benefits at retirement based on years of service and final average earnings. In Canada, future enrollment is limited to eligible employees who may elect to move from the defined contribution component to the defined benefit component for their future service. In the U.S., the defined benefit pension is closed to new members. The Company’s OPEB plans provides certain retired employees with health care and dental benefits.
The Company is required to file actuarial valuations of its registered defined benefit pension plans with regulators on a periodic basis. The most recently filed valuation for the Canadian defined benefit pension plan was dated December 31, 2022, and the next required actuarial valuation will be as at December 31, 2025. The most recently filed valuation for the U.S. defined benefit pension plan was dated January 1, 2023, and the next required actuarial valuation will be as at January 1, 2024.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 51 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
A) Plan Obligations, Assets and Funded Status
| DB Pension Plan | OPEB Plans | |||
|---|---|---|---|---|
| 2023 | 2022 | 2023 | 2022 | |
| Defined Benefit Obligation | ||||
| Defined Benefit Obligation, Beginning of Year | 172 | 220 | 174 | 225 |
| Current Service Costs | 10 | 16 | 14 | 8 |
| Past Service Costs - Curtailment and Plan Amendments | — | — | 10 | — |
| Interest Costs (1) | 9 | 7 | 10 | 7 |
| Benefits Paid | (8) | (12) | (9) | (8) |
| Plan Participant Contributions | 3 | 2 | — | — |
| Re-measurements: | ||||
| (Gains) Losses From Experience Adjustments | 4 | 1 | 1 | (2) |
| (Gains) Losses From Changes in Financial Assumptions | 13 | (64) | 50 | (57) |
| Exchange Rate Movements and Other | (1) | 2 | (1) | 1 |
| Defined Benefit Obligation, End of Year | 202 | 172 | 249 | 174 |
| Plan Assets | ||||
| Fair Value of Plan Assets, Beginning of Year | 147 | 159 | — | — |
| Employer Contributions | 18 | 16 | 9 | 8 |
| Plan Participant Contributions | 3 | 2 | — | — |
| Benefits Paid | (7) | (10) | (9) | (8) |
| Interest Income (1) | 8 | 4 | — | — |
| Re-measurements: | ||||
| Return on Plan Assets (Excluding Interest Income) | 10 | (26) | — | — |
| Exchange Rate Movements and Other | (1) | 2 | — | — |
| Fair Value of Plan Assets, End of Year | 178 | 147 | — | — |
| Defined Benefit Pension and OPEB Asset (Liability) (2) | (24) | (25) | (249) | (174) |
(1)Based on the discount rate of the defined benefit obligation at the beginning of the year.
(2)Liabilities for the DB Pension Plan and OPEB plans are included in other liabilities.
The weighted average duration of the obligations for the DB Pension Plan and OPEB plans are 15 years and 14 years, respectively.
B) Costs
| DB Pension Plan and <br>DC Pension Plan | OPEB Plans | ||||
|---|---|---|---|---|---|
| For the years ended December 31, | 2023 | 2022 | 2023 | 2022 | |
| Defined Benefit Plan Cost | |||||
| Current Service Costs | 10 | 16 | 14 | 8 | |
| Past Service Costs – Curtailments and Plan Amendments | — | — | 10 | — | |
| Net Interest Costs | 1 | 3 | 10 | 7 | |
| Re-measurements: | |||||
| Return on Plan Assets (Excluding Interest Income) | (10) | 26 | — | — | |
| (Gains) Losses From Experience Adjustments | 4 | 1 | 1 | (2) | |
| (Gains) Losses From Changes in Demographic Assumptions | — | — | — | — | |
| (Gains) Losses From Changes in Financial Assumptions | 13 | (64) | 50 | (57) | |
| Defined Benefit Plan Cost (Recovery) | 18 | (18) | 85 | (44) | |
| Defined Contribution Plan Cost (1) | 99 | 72 | — | — | |
| Total Plan Cost | 117 | 54 | 85 | (44) |
(1)Includes defined contribution and U.S. 401(k) plans.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 52 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
C) Investment Objectives and Fair Value of Plan Assets
The objective of the asset allocation is to manage the funded status of the DB Pension Plan at an appropriate level of risk, giving consideration to the security of the assets and the potential volatility of market returns and the resulting effect on both contribution requirements and pension expense. The long-term return is expected to achieve or exceed the return from a composite benchmark comprised of passive investments in appropriate market indices. The asset allocation structure is subject to diversification requirements and constraints that reduce risk by limiting exposure to individual equity investment and credit rating categories.
The allocation of assets between the various types of investment funds is monitored regularly and is re-balanced as necessary. The Canadian defined benefit pension plan and U.S. defined benefit pension plan are managed independently of each other and, accordingly, the target asset allocation is reflective of their different liability profiles. The Company does not use derivative instruments to manage the risks of its plan assets. There has been no change in the process used by the Company to manage these risks from prior periods.
The fair value of the DB Pension Plan assets, as represented by fair value hierarchy levels are as follows:
| As at December 31, | 2023 | 2022 |
|---|---|---|
| Level 1 – Cash and Cash Equivalents | 5 | 7 |
| Level 2 – Equity and Fixed Income Funds | 161 | 130 |
| Level 3 – Real Estate Funds and Other | 12 | 10 |
| 178 | 147 |
The DB Pension Plan does not hold any direct investment in Cenovus common shares or preferred shares.
D) Funding
The DB Pension Plan is funded in accordance with applicable pension legislation. Contributions are made to trust funds administered by independent trustees. The Company’s contributions to the DB Pension Plan are based on the most recent actuarial valuations and the direction of the Management Pension Committees and Human Resources and Compensation Committee of the Board of Directors.
Employees participating in the Canadian defined benefit pension are required to contribute four percent of their pensionable earnings, up to an annual maximum, and the Company provides the balance of the funding necessary to ensure benefits will be fully provided for at retirement. In the year ended December 31, 2024, the Company expects to contribute $11 million to the DB Pension Plan.
The OPEB plans are funded on an as required basis. For the year ended December 31, 2024, the Company expects to contribute $13 million to the OPEB plans.
E) Actuarial Assumptions and Sensitivities
Actuarial Assumptions
The principal weighted average actuarial assumptions used to determine benefit obligations are as follows:
| Defined Benefit Plan | OPEB Plans | ||||
|---|---|---|---|---|---|
| For the years ended December 31, | 2023 | 2022 | 2023 | 2022 | |
| Discount Rate (percent) | 4.58 | 5.12 | 4.65 | 5.13 | |
| Future Salary Growth Rate (percent) | 4.00 | 4.05 | N/A | N/A | |
| Average Longevity (years) | 88.4 | 88.4 | 88.4 | 88.4 | |
| Health Care Cost Trend Rate (percent) | N/A | N/A | 5.24 | 5.24 |
Discount rates are based on market yields for high quality corporate debt instruments with maturity terms equivalent to the benefit obligations.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 53 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Sensitivities
The sensitivity of the DB Pension Plan and OPEB plan obligations to a one percent change in future salary growth rate, health care cost trend rate, or a one year change in assumed life expectancy is nominal. A one percent change in discount rate, while holding all other assumptions constant, would result in a sensitivity to change as follows:
| 2023 | 2022 | |||
|---|---|---|---|---|
| As at December 31, | Increase | Decrease | Increase | Decrease |
| Discount Rate | (54) | 66 | (43) | 51 |
Actual experience may result in a number of assumptions changing simultaneously, and the changes in some assumptions may be correlated. When calculating the sensitivity of the DB Pension Plan and the OPEB plan obligations to significant actuarial assumptions, the same methodologies have been applied as when valuing the obligations to be recognized on the Consolidated Balance Sheets.
| 30. 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
| 2023 | 2022 | |||
|---|---|---|---|---|
| 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 | 1,909,190 | 16,320 | 2,001,211 | 17,016 |
| Issued Upon Exercise of Warrants | 2,610 | 26 | 9,399 | 93 |
| Issued Under Stock Option Plans | 3,679 | 58 | 11,069 | 170 |
| Purchase of Common Shares under NCIB | (43,611) | (373) | (112,489) | (959) |
| Outstanding, End of Year | 1,871,868 | 16,031 | 1,909,190 | 16,320 |
As at December 31, 2023, there were 45.5 million (December 31, 2022 – 43.1 million) common shares available for future issuance under the stock option plan.
C) Normal Course Issuer Bid
On November 7, 2023, the Company received approval from the TSX to renew the Company’s NCIB program to purchase up to 133.2 million common shares during the period from November 9, 2023, to November 8, 2024.
For the year ended December 31, 2023, the Company purchased and cancelled 43.6 million common shares (2022 – 112.5 million) through the NCIB. The shares were purchased at a volume weighted average price of $24.32 per common share (2022 – $22.49) for a total of $1.1 billion (2022 – $2.5 billion). Paid in surplus was reduced by $688 million (2022 – $1.6 billion), representing the excess of the purchase price of the common shares over their average carrying value.
From January 1, 2024, to February 12, 2024, the Company purchased an additional 4.3 million common shares for $92 million. As at February 12, 2024, the Company can further purchase up to 118.3 million common shares under the NCIB.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 54 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
D) Issued and Outstanding – Preferred Shares
For the year ended December 31, 2023, there were no preferred shares issued. As at December 31, 2023, there were 36 million preferred shares outstanding (December 31, 2022 – 36 million), with a carrying value of $519 million (December 31, 2022 – $519 million).
| As at December 31, 2023 | Dividend Reset Date | Dividend Rate<br><br>(percent) | Number of Preferred Shares (thousands) |
|---|---|---|---|
| Series 1 First Preferred Shares | March 31, 2026 | 2.58 | 10,740 |
| Series 2 First Preferred Shares (1) | Quarterly | 6.77 | 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 5.86 percent from December 31, 2022, to March 30, 2023 (December 31, 2021, to March 30, 2022 – 1.86 percent); 6.29 percent from March 31, 2023, to June 29, 2023 (March 31, 2022, to June 29, 2022 – 2.35 percent); 6.29 percent from June 30, 2023, to September 29, 2023 (June 30, 2022, to September 29, 2022 – 3.21 percent); and 6.89 percent from September 30, 2023, to December 30, 2023 (September 30, 2022, to December 30, 2022 – 5.05 percent).
Every five years, subject to certain conditions, the holders of first preferred shares will have the right, at their option, to convert their shares into a specified series of first preferred shares. On March 31, 2026, and on March 31 every five years thereafter, holders of series 1 and series 2 first preferred shares will have such option to convert their shares into the other series. On December 31, 2024, and on December 31 every five years thereafter, holders of series 3 and series 4 first preferred shares will have such option to convert their shares into the other series. On March 31, 2025, and on March 31 every five years thereafter, holders of series 5 and series 6 first preferred shares will have such option to convert their shares into the other series. On June 30, 2025, and on June 30 every five years thereafter, holders of series 7 and series 8 first preferred shares will have such option to convert their shares into the other series.
Each series of outstanding first preferred shares are entitled to receive a cumulative quarterly dividend, payable on the last day of March, June, September and December in each year, if, as and when declared by Cenovus’s Board of Directors. For the series 1, series 3, series 5 and series 7 first preferred shares, such dividend rate resets every five years at the rate equal to the sum of the five-year Government of Canada bond yield on the applicable calculation date plus 1.73 percent (series 1), 3.13 percent (series 3), 3.57 percent (series 5) and 3.52 percent (series 7). For the series 2, series 4, series 6 and series 8 first preferred shares, such dividend rate resets every quarter at the rate equal to the sum of the 90-day Government of Canada Treasury Bill yield on the applicable calculation date plus 1.73 percent (series 2), 3.13 percent (series 4), 3.57 percent (series 6) and 3.52 percent (series 8).
Every five years, subject to certain conditions, on the applicable conversion date Cenovus may, at its option, redeem all or any number of the then-outstanding series of first preferred shares by payment of an amount in cash for each share to be redeemed equal to $25.00. In addition, subject to certain conditions, on any other date Cenovus may, at its option, redeem all or any number of the then-outstanding series 2, series 4, series 6 and series 8 first preferred shares, by payment of an amount in cash for each share to be redeemed equal to $25.50. In each case, such payment shall also include all accrued and unpaid dividends thereon to but excluding the date fixed for redemption (less any tax or other amount required to be deducted and withheld).
Second Preferred Shares
There were no second preferred shares outstanding as at December 31, 2023 (December 31, 2022 – nil).
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 55 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
E) Issued and Outstanding – Warrants
| 2023 | 2022 | |||
|---|---|---|---|---|
| Number of<br><br>Warrants<br><br>(thousands) | Amount | Number of<br><br>Warrants<br><br>(thousands) | Amount | |
| Outstanding, Beginning of Year | 55,720 | 184 | 65,119 | 215 |
| Exercised | (2,610) | (8) | (9,399) | (31) |
| Purchased and Cancelled | (45,485) | (151) | — | — |
| Outstanding, End of Year | 7,625 | 25 | 55,720 | 184 |
The exercise price of the warrants is $6.54 per share.
On June 14, 2023, Cenovus purchased and cancelled 45.5 million warrants. The price for each warrant purchased represented a price of $22.18 per common share, less the warrant exercise price of $6.54 per common share, for a total of $711 million. Retained earnings was reduced by $560 million, representing the excess of the purchase price of the warrants over their average carrying value, and $2 million in transaction costs.
The purchased warrants were paid in full by December 31, 2023.
F) Paid in Surplus
Cenovus’s paid in surplus reflects the Company’s retained earnings prior to the split of Encana Corporation (now known as Ovintiv Inc. (“Ovintiv”)) under the plan of arrangement into two independent energy companies, Ovintiv and Cenovus. In addition, paid in surplus includes the excess of the purchase price of common shares over their average carrying value for shares purchased under the NCIB and stock-based compensation expense related to the Company’s NSRs discussed in Note 32.
| Retained Earnings Prior to Ovintiv Split | Stock-Based Compensation | Total | ||||
|---|---|---|---|---|---|---|
| As at December 31, 2021 | 3,966 | 318 | 4,284 | |||
| Stock-Based Compensation Expense | — | 10 | 10 | |||
| Purchase of Common Shares Under NCIB | (1,571) | — | (1,571) | |||
| Common Shares Issued on Exercise of Stock Options | — | (32) | (32) | |||
| As at December 31, 2022 | 2,395 | 296 | 2,691 | |||
| Stock-Based Compensation Expense | — | 11 | 11 | |||
| Purchase of Common Shares Under NCIB | (688) | — | (688) | |||
| Common Shares Issued on Exercise of Stock Options | — | (12) | (12) | |||
| As at December 31, 2023 | 1,707 | 295 | 2,002 | |||
| 31. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) | ||||||
| --- | Pension and Other Post-Retirement Benefits | Private Equity Instruments | Foreign Currency Translation Adjustment | Total | ||
| --- | --- | --- | --- | --- | ||
| As at December 31, 2021 | 28 | 27 | 629 | 684 | ||
| Other Comprehensive Income (Loss), Before Tax | 96 | 2 | 713 | 811 | ||
| Income Tax (Expense) Recovery | (25) | — | — | (25) | ||
| As at December 31, 2022 | 99 | 29 | 1,342 | 1,470 | ||
| Other Comprehensive Income (Loss), Before Tax | (58) | 63 | (286) | (281) | ||
| Reclassification on Divestiture (Note 5) | — | — | 12 | 12 | ||
| Income Tax (Expense) Recovery | 14 | (7) | — | 7 | ||
| As at December 31, 2023 | 55 | 85 | 1,068 | 1,208 | ||
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 56 | |||||
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 32. STOCK-BASED COMPENSATION PLANS |
|---|
Cenovus has a number of stock-based compensation plans that include NSRs, Cenovus replacement stock options, PSUs, RSUs and DSUs.
On February 27, 2023, Cenovus granted PSUs and RSUs to certain employees under its new Performance Share Unit Plan for Local Employees in the Asia Pacific Region and Restricted Share Unit Plan for Local Employees in the Asia Pacific Region. The PSUs are time-vested whole-share units that entitle employees to receive a cash payment equal to the value of a Cenovus common share. The number of units eligible to vest is determined by a multiplier that ranges from zero percent to 200 percent and is based on the Company achieving key pre-determined performance measures. The RSUs are whole-share units and entitle employees to receive, upon vesting, a cash payment equal to the value of a Cenovus common share.
A) Employee Stock Options
Cenovus has an Employee Stock Option Plan that provides employees with the opportunity to exercise an option to purchase a common share of the Company. Option exercise prices approximate the market value for the common shares on the date the options were issued. Options granted are exercisable at 30 percent of the number granted after one year, an additional 30 percent of the number granted after two years and are fully exercisable after three years. Options expire after seven years.
Options issued by the Company have associated NSRs. The NSR, in lieu of exercising the option, gives the option holder the right to receive the number of common shares that could be acquired with the excess value of the market price of Cenovus's common shares at the time of exercise over the exercise price of the option. Alternatively, the holder may elect to exercise the option and receive a net cash payment equal to the excess of the market price received from the sale of the common shares over the exercise price of the option.
The NSRs vest and expire under the same term and conditions of the underlying option.
Stock Options With Associated Net Settlement Rights
The weighted average unit fair value of NSRs granted during the year ended December 31, 2023, was $7.41 before considering forfeitures, which are considered in determining total cost for the period. The fair value of each NSR was estimated on its grant date using the Black-Scholes-Merton valuation model with weighted average assumptions as follows:
| Risk-Free Interest Rate (percent) | 3.42 |
|---|---|
| Expected Dividend Yield (percent) | 1.78 |
| Expected Volatility (1) (percent) | 31.95 |
| Expected Life (years) | 5.45 |
(1)Expected volatility has been based on historical share volatility of the Company.
| Number of Stock Options with Associated Net Settlement Rights | Weighted <br>Average <br>Exercise Price | |
|---|---|---|
| For the year ended December 31, 2023 | (thousands) | ($/unit) |
| Outstanding, Beginning of Year | 14,349 | 12.38 |
| Granted | 1,571 | 24.34 |
| Exercised | (3,839) | 13.08 |
| Forfeited | (128) | 15.78 |
| Expired | (58) | 19.89 |
| Outstanding, End of Year | 11,895 | 13.66 |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 57 | |
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| Outstanding | Exercisable | ||||
|---|---|---|---|---|---|
| As at December 31, 2023 | Number of <br>Stock Options with Associated Net Settlement Rights | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number of <br>Stock Options with Associated Net Settlement Rights | Weighted Average Exercise Price |
| Range of Exercise Price ($) | (thousands) | (years) | ($/unit) | (thousands) | ($/unit) |
| 5.00 to 9.99 | 4,303 | 3.83 | 8.77 | 2,218 | 8.85 |
| 10.00 to 14.99 | 4,163 | 2.92 | 11.93 | 3,894 | 11.94 |
| 15.00 to 19.99 | 1,851 | 5.13 | 19.88 | 536 | 19.88 |
| 20.00 to 24.99 | 1,561 | 6.17 | 24.25 | 10 | 22.75 |
| 25.00 to 29.99 | 17 | 6.70 | 27.71 | — | — |
| 11,895 | 4.03 | 13.66 | 6,658 | 11.56 |
Cenovus Replacement Stock Options
For the year ended December 31, 2023, 2.1 million Cenovus replacement stock options, with a weighted average exercise price of $9.98, were exercised and net settled for cash and 3 thousand Cenovus replacement stock options were exercised with a weighted average price of $3.54 and settled for 2 thousand common shares.
The Company recorded a liability of $12 million as at December 31, 2023, (December 31, 2022 – $42 million) for Cenovus replacement stock options based on the fair value at year end using the Black-Scholes-Merton valuation model.
| Number of Cenovus Replacement Stock Options | Weighted Average Exercise Price | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| For the year ended December 31, 2023 | (thousands) | ($/unit) | |||||||
| Outstanding, Beginning of Year | 3,467 | 9.99 | |||||||
| Exercised | (2,113) | 9.97 | |||||||
| Forfeited | (23) | 6.58 | |||||||
| Expired | (326) | 21.09 | |||||||
| Outstanding, End of Year | 1,005 | 6.49 | Outstanding | Exercisable | |||||
| --- | --- | --- | --- | --- | --- | ||||
| As at December 31, 2023 | Number of Cenovus Replacement Stock Options | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number of Cenovus Replacement Stock Options | Weighted Average Exercise Price | ||||
| Range of Exercise Price ($) | (thousands) | (years) | ($/unit) | (thousands) | ($/unit) | ||||
| 3.00 to 4.99 | 782 | 1.22 | 3.54 | 782 | 3.54 | ||||
| 5.00 to 9.99 | 28 | 0.42 | 6.19 | 28 | 6.19 | ||||
| 10.00 to 14.99 | — | — | — | — | — | ||||
| 15.00 to 19.99 | 195 | 0.18 | 18.35 | 195 | 18.35 | ||||
| 1,005 | 0.99 | 6.49 | 1,005 | 6.49 |
B) Performance Share Units
In addition to the Performance Share Unit Plan for Local Employees in the Asia Pacific Region, Cenovus has granted PSUs to certain employees under its Performance Share Unit Plan for Employees. The PSUs are time-vested whole-share units that entitle employees to receive, upon vesting, either a common share of Cenovus or a cash payment equal to the value of a Cenovus common share.
The number of PSUs eligible to vest is determined by a multiplier that ranges from zero percent to 200 percent and is based on the Company achieving key pre-determined performance measures. PSUs vest after three years.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 58 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
The Company has recorded a liability of $238 million as at December 31, 2023, (December 31, 2022 – $216 million) for PSUs based on the market value of Cenovus’s common shares at the end of the year. PSUs are paid out upon vesting and, as a result, the intrinsic value was $nil as at December 31, 2023.
| Number of Performance Share Units | |
|---|---|
| For the year ended December 31, 2023 | (thousands) |
| Outstanding, Beginning of Year | 8,678 |
| Granted | 2,539 |
| Vested and Paid Out | (972) |
| Forfeited | (231) |
| Units in Lieu of Base Dividends | 229 |
| Outstanding, End of Year | 10,243 |
C) Restricted Share Units
In addition to the Restricted Share Unit Plan for Local Employees in the Asia Pacific Region, Cenovus granted RSUs to certain employees under its Restricted Share Unit Plan for Employees. RSUs are whole-share units and entitle employees to receive, upon vesting, either a common share of Cenovus or a cash payment equal to the value of a Cenovus common share. RSUs generally vest over three years.
The Company recorded a liability of $97 million as at December 31, 2023, (December 31, 2022 – $109 million) for RSUs based on the market value of Cenovus’s common shares at the end of the year. As RSUs are paid out upon vesting, the intrinsic value of vested RSUs was $nil as at December 31, 2023.
| Number of Restricted Share Units | |
|---|---|
| For the year ended December 31, 2023 | (thousands) |
| Outstanding, Beginning of Year | 6,655 |
| Granted | 2,961 |
| Vested and Paid Out | (2,300) |
| Forfeited | (243) |
| Units in Lieu of Base Dividends | 161 |
| Outstanding, End of Year | 7,234 |
D) Deferred Share Units
Under two Deferred Share Unit Plans, Cenovus directors, officers and certain employees may receive DSUs, which are equivalent in value to a common share of the Company. Eligible employees have the option to convert either zero, 25, 50, 75 or 100 percent of their annual bonus award into DSUs. DSUs vest immediately, are settled in cash and are redeemed in accordance with the terms of the agreement and expire on December 15 of the calendar year following the year of cessation of directorship or employment.
The Company recorded a liability of $37 million as at December 31, 2023 (December 31, 2022 – $40 million) for DSUs based on the market value of Cenovus’s common shares at the end of the year. The intrinsic value of vested DSUs equals the carrying value as DSUs vest at the time of grant.
| Number of Deferred <br>Share Units | |
|---|---|
| For the year ended December 31, 2023 | (thousands) |
| Outstanding, Beginning of Year | 1,506 |
| Granted to Directors | 126 |
| Granted | 59 |
| Units in Lieu of Dividends | 37 |
| Redeemed | (37) |
| Outstanding, End of Year | 1,691 |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 59 |
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
E) Total Stock-Based Compensation
| For the years ended December 31, | 2023 | 2022 | ||
|---|---|---|---|---|
| Stock Options With Associated Net Settlement Rights | 11 | 15 | ||
| Cenovus Replacement Stock Options | (5) | 53 | ||
| Performance Share Units | 47 | 183 | ||
| Restricted Share Units | 46 | 100 | ||
| Deferred Share Units | (2) | 22 | ||
| Total Stock-Based Compensation Expense (Recovery) | 97 | 373 | ||
| 33. EMPLOYEE SALARIES AND BENEFIT EXPENSES | ||||
| --- | For the years ended December 31, | 2023 | 2022 | |
| --- | --- | --- | ||
| Salaries, Bonuses and Other Short-Term Employee Benefits | 1,344 | 1,246 | ||
| Pension and Post-Employment Benefits | 125 | 92 | ||
| Stock-Based Compensation (Note 32) | 97 | 373 | ||
| Other Incentive Benefits (Recovery) | — | (9) | ||
| Termination Benefits | 14 | 27 | ||
| 1,580 | 1,729 | |||
| 34. RELATED PARTY TRANSACTIONS | ||||
| --- |
A) Key Management Compensation
Key management includes Directors (executive and non-executive), Executive Officers, Senior Vice-Presidents and Vice-Presidents. The compensation paid or payable to key management is:
| For the years ended December 31, | 2023 | 2022 |
|---|---|---|
| Salaries, Director Fees and Other Short-Term Benefits | 40 | 40 |
| Pension and Post-Employment Benefits | 3 | 4 |
| Stock-Based Compensation | 40 | 140 |
| Termination Benefits | — | 3 |
| 83 | 187 |
B) Other Related Party Transactions
Transactions with HMLP are related party transactions as the Company has a 35 percent ownership interest (see Note 21). 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 year ended December 31, 2023, the Company charged HMLP $160 million (2022 – $188 million) for construction costs and management services.
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 year ended December 31, 2023, the Company incurred costs of $295 million (2022 – $263 million) for the use of HMLP’s pipeline systems, as well as transportation and storage services.
| 35. FINANCIAL INSTRUMENTS |
|---|
Cenovus’s financial assets and financial liabilities consist of cash and cash equivalents, accounts receivable and accrued revenues, restricted cash, risk management assets and liabilities, accounts payable and accrued liabilities, short-term borrowings, lease liabilities, contingent payments, long-term debt and certain portions of other assets 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.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 60 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
The fair values of restricted cash, certain portions of other assets and other liabilities, 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 debt was determined based on period-end trading prices of long-term debt on the secondary market (Level 2). As at December 31, 2023, the carrying value of Cenovus’s long-term debt was $7.1 billion and the fair value was $6.6 billion (December 31, 2022 carrying value – $8.7 billion, fair value – $7.8 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 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:
| 2023 | 2022 | |
|---|---|---|
| Fair Value, Beginning of Year | 55 | 53 |
| Acquisition | 13 | — |
| Changes in Fair Value | 63 | 2 |
| Fair Value, End of Year | 131 | 55 |
B) Fair Value of Risk Management Assets and Liabilities
Risk management assets and liabilities are carried at fair value in accounts receivable and accrued revenues, accounts payable and accrued liabilities (for short-term positions), other liabilities and other assets (for long-term positions). Changes in fair value are recorded in (gain) loss on risk management.
The Company’s risk management assets and liabilities consist of crude oil, condensate, natural gas, and refined product futures, as well as renewable power, power and foreign exchange contracts. The Company may also enter into swaps, forwards, and options to manage commodity, foreign exchange and interest rate exposures.
Crude oil, natural gas, condensate, refined product and power contracts 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 is calculated using external valuation models that incorporate observable market data and foreign exchange forward curves (Level 2).
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.
Summary of Risk Management Positions
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Risk Management | Risk Management | |||||
| As at December 31, | Asset | Liability | Net | Asset | Liability | Net |
| Crude Oil, Natural Gas, Condensate and Refined Products | 11 | 19 | (8) | 2 | 40 | (38) |
| Power Swap Contracts | 2 | — | 2 | 1 | 7 | (6) |
| Renewable Power Contracts | 18 | — | 18 | 90 | — | 90 |
| 31 | 19 | 12 | 93 | 47 | 46 |
The following table presents the Company’s fair value hierarchy for risk management assets and liabilities carried at fair value:
| As at December 31, | 2023 | 2022 |
|---|---|---|
| Level 2 – Prices Sourced From Observable Data or Market Corroboration | (6) | (44) |
| Level 3 – Prices Sourced From Partially Unobservable Data | 18 | 90 |
| 12 | 46 | |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 61 | |
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
The following table provides a reconciliation of changes in the fair value of Cenovus’s risk management assets and liabilities:
| 2023 | 2022 | |
|---|---|---|
| Fair Value of Contracts, Beginning of Year | 46 | (68) |
| Change in Fair Value of Contracts in Place at Beginning of Year | — | (5) |
| Change in Fair Value of Contracts Entered Into During the Year | (45) | (1,641) |
| Fair Value of Contracts Realized During the Year | 9 | 1,762 |
| Unrealized Foreign Exchange Gain (Loss) on U.S. Dollar Contracts | 2 | (2) |
| Fair Value of Contracts, End of Year | 12 | 46 |
Offsetting Financial Assets and Liabilities
Cenovus offsets risk management assets and liabilities when the counterparty, currency and timing of settlement are the same.
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Risk Management | Risk Management | |||||
| As at December 31, | Asset | Liability | Net | Asset | Liability | Net |
| Recognized Risk Management Positions | ||||||
| Gross Amount | 71 | 59 | 12 | 153 | 107 | 46 |
| Amount Offset | (40) | (40) | — | (60) | (60) | — |
| Net Amount | 31 | 19 | 12 | 93 | 47 | 46 |
The derivative liabilities do not have credit risk-related contingent features. Due to credit practices that limit transactions according to counterparties’ credit quality, the change in fair value through profit or loss attributable to changes in the credit risk of financial liabilities is immaterial.
Cenovus pledges cash collateral with respect to certain of these risk management contracts, which is not offset against the related financial liability. The amount of cash collateral required will vary daily over the life of these risk management contracts as commodity prices change. As at December 31, 2023, $47 million was pledged as cash collateral (December 31, 2022 – $211 million).
C) Earnings Impact of (Gains) Losses From Risk Management Positions
| For the years ended December 31, | 2023 | 2022 |
|---|---|---|
| Realized (Gain) Loss | 9 | 1,762 |
| Unrealized (Gain) Loss | 52 | (126) |
| (Gain) Loss on Risk Management | 61 | 1,636 |
Realized and unrealized gains and losses on risk management are recorded in the reportable segment to which the derivative instrument relates.
D) Fair Value of Contingent Payments
The variable payment (Level 3) associated with the Sunrise Acquisition is carried at fair value in the contingent payments. Fair value is estimated by calculating the present value of the expected future cash flows using an option pricing model, 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 that was discounted using a credit-adjusted risk-free rate. Fair value of the variable payment was calculated by Cenovus’s internal valuation team, which consists of individuals who are knowledgeable and have experience in fair value techniques. As at December 31, 2023, the fair value of the variable payment was estimated to be $164 million applying a credit-adjusted risk-free rate of 5.6 percent.
As at December 31, 2023, average WCS forward pricing for the remaining term of the variable payment is $71.86 per barrel. The average volatility of WTI options and the Canadian-U.S. foreign exchange rates was 39.4 percent and 5.8 percent, respectively.
As at December 31, 2023 and December 31, 2022, changes in WCS forward prices, with fluctuations in all other variables held constant, could have impacted earnings before income tax as follows:
| 2023 | 2022 | ||||
|---|---|---|---|---|---|
| As at December 31, | Sensitivity Range | Increase | Decrease | Increase | Decrease |
| WCS Forward Prices | ± $10.00 per barrel | (21) | 45 | (68) | 157 |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 62 | ||||
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
As at December 31, 2023 and December 31, 2022, a 10 percent increase or decrease in WTI option price volatility, or a five percent increase or decrease in Canadian to U.S. dollar foreign exchange rate option volatility would have resulted in nominal changes to earnings before income tax.
| 36. 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, and power consumption. The Company may also enter into arrangements, such as renewable power contracts or power swaps, to manage exposure to future carbon compliance costs, power prices, energy costs associated with the production, transportation and refining of crude oil, or to offset select carbon emissions.
To manage exposure to interest rate volatility, the Company may 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.
As at December 31, 2023, the fair value of risk management positions was a net asset of $12 million (see Note 35). As at December 31, 2023, there were no foreign exchange contracts, interest rate contracts or cross currency interest rate swap contracts outstanding. As at December 31, 2022, there were forward exchange contracts with a notional value of US$168 million outstanding and there were no interest rate contracts or cross currency interest rate swap contracts outstanding.
Net Fair Value of Risk Management Positions
| As at December 31, 2023 | 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 | 3.5 MMbbls | January 2024 – December 2024 | US$75.22/bbl | 16 |
| WTI Fixed – Buy | 1.5 MMbbls | January 2024 – December 2024 | US$73.69/bbl | (4) |
| Power Swap Contacts | 2 | |||
| Renewable Power Contracts | 18 | |||
| Other Financial Positions (5) | (20) | |||
| Total Fair Value | 12 |
(1)Million barrels ("MMbbls").
(2) Notional volumes and weighted average price are based on multiple contracts of varying amounts and terms over the respective time period; therefore, the notional volumes and weighted average price may fluctuate from month to month.
(3) Includes individual contracts with varying terms, the longest of which is 13 months.
(4) WTI futures contracts are used to help manage price exposure to condensate used for blending.
(5) Includes 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 and the Company’s U.S. refining and marketing activities.
A) Commodity Price and Foreign Exchange Rate Risk
i) Commodity Price Risk
Commodity price risk arises from the effect that fluctuations of forward commodity prices may have on the fair value or future cash flows of financial assets and liabilities. To partially mitigate exposure to commodity price risk, the Company has entered into various financial derivative instruments.
The use of these derivative instruments is governed under formal policies and is subject to limits established by the Board of Directors. The Company’s policy does not allow the use of derivative instruments for speculative purposes.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 63 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
The Company has used crude oil, natural gas and refined product swaps, futures, basis price risk management contracts and, if entered into, forwards, options, as well as condensate futures and swaps. These derivative instruments are used to partially mitigate exposure to the commodity price risk on its crude oil and condensate transactions and to protect both near-term and future cash flows. Cenovus has entered into a number of transactions to help protect against widening light/heavy crude oil price differentials and to manage exposure to commodity price movements between when products are produced or purchased and when sold to the customer or used by Cenovus. In addition, the Company has entered into risk management positions to help mitigate the risk to incremental margin expected to be received in future periods at the time products will be sold. The Company has used commodity futures and swaps, as well as differential price risk management contracts to partially mitigate its exposure to the commodity price risk on its condensate transactions. Natural gas fixed price and basis instruments are used to partially mitigate its natural gas commodity price risk.
ii) Foreign Exchange Risk
Foreign exchange risk arises from changes in foreign exchange rates that may affect the fair value or future cash flows of Cenovus’s financial assets or liabilities. As Cenovus operates in North America, fluctuations in the exchange rate between the U.S./Canadian dollar can have a significant effect on reported results.
Cenovus’s foreign exchange (gain) loss primarily includes unrealized foreign exchange gains and losses on the translation of the U.S. dollar debt issued from Canada (see Note 9). As at December 31, 2023, Cenovus had US$3.8 billion in U.S. dollar debt (December 31, 2022 – US$4.8 billion).
iii) Commodity Price and Foreign Exchange Rate Sensitivities
The following tables summarize 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 tables below are a reasonable measure of volatility.
The impact of the below 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 December 31, 2023 | Sensitivity Range | Increase | Decrease |
|---|---|---|---|
| Power Commodity Price | ± C$20.00/MWh (1) Applied to Power Hedges | 92 | (92) |
(1)One thousand kilowatts of electricity per hour (“MWh”).
As at December 31, 2023, a sensitivity analysis for the following fluctuating commodity prices and foreign exchange rates on the Company’s open risk management positions was found to result in a nominal unrealized gain (loss) impacting earnings before income tax:
•A US$10.00 per barrel increase or decrease in the benchmark crude oil and benchmark condensate commodity price (primarily WTI).
•A US$2.50 per barrel increase or decrease in the WCS (excluding the Hardisty location) and condensate differential price.
•A US$5.00 per barrel increase or decrease in the WCS differential price.
•A US$10.00 per barrel increase or decrease in refined products commodity prices.
•A US$1.00 per one thousand cubic feet increase or decrease in the Henry Hub commodity price.
•A US$0.50 per one thousand cubic feet increase or decrease in natural gas basis prices.
•A $0.05 increase or decrease in the U.S. to Canadian dollar exchange rate.
| As at December 31, 2022 | Sensitivity Range | Increase | Decrease |
|---|---|---|---|
| WCS and Condensate Differential Price | ± US$2.50/bbl Applied to WCS and Differential Hedges Tied to Production | 13 | (13) |
| Power Commodity Price | ± C$20.00/MWh Applied to Power Hedges | 113 | (113) |
| U.S. to Canadian Dollar Exchange Rate | ± $0.05 in the U.S. to Canadian Dollar Exchange Rate | 14 | (17) |
As at December 31, 2022, a sensitivity analysis for the following fluctuating commodity prices and foreign exchange rates on the Company’s open risk management positions was found to result in a nominal unrealized gain (loss) impacting earnings before income tax:
•A US$10.00 per barrel increase or decrease in the benchmark crude oil and benchmark condensate commodity price (primarily WTI).
•A US$5.00 per barrel increase or decrease in the WCS differential price.
•A US$10.00 per barrel increase or decrease in refined products commodity prices.
•A US$1.00 per one thousand cubic feet increase or decrease in the Henry Hub commodity price.
•A $0.50 per one thousand cubic feet increase or decrease in natural gas basis prices.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 64 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
In respect of these financial instruments, the impact of changes in the Canadian per U.S. dollar exchange rate would have resulted in a change to the foreign exchange (gain) loss as follows:
| As at December 31, | 2023 | 2022 |
|---|---|---|
| $0.05 Increase in the Canadian per U.S. Dollar Foreign Exchange Rate | 197 | 246 |
| $0.05 Decrease in the Canadian per U.S. Dollar Foreign Exchange Rate | (197) | (246) |
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 December 31, 2023, approximately 83 percent (December 31, 2022 – 85 percent) of the Company’s accounts receivable and accrued revenues were with investment grade counterparties, and 98 percent of the Company’s accounts receivable were outstanding for less than 60 days. The associated average ECL on these accounts was 0.4 percent as at December 31, 2023 (December 31, 2022 – 0.4 percent).
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, by maintaining appropriate access to credit, which may be impacted by the Company’s credit ratings, and by ensuring that it has access to multiple sources of capital. As disclosed in Note 25, 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 at the bottom of the commodity price cycle to manage the Company’s overall debt position.
As at December 31, 2023, the Company’s sources of capital included:
•$2.2 billion in cash and cash equivalents.
•$5.5 billion available on its committed credit facility.
•$1.4 billion available on its uncommitted demand facilities, of which $1.1 billion may be drawn for general purposes, or the full amount may be available to issue letters of credit.
•US$90 million (C$119 million) on the Company’s proportionate share of the uncommitted demand facilities from WRB.
•The base shelf prospectus, availability of which is dependent on market conditions.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 65 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
Undiscounted cash outflows relating to financial liabilities are:
| As at December 31, 2023 | 1 Year | Years 2 and 3 | Years 4 and 5 | Thereafter | Total |
|---|---|---|---|---|---|
| Accounts Payable and Accrued Liabilities (1) | 5,480 | — | — | — | 5,480 |
| Short-Term Borrowings | 179 | — | — | — | 179 |
| Contingent Payments | 168 | — | — | — | 168 |
| Lease Liabilities (2) | 438 | 712 | 569 | 2,635 | 4,354 |
| Long-Term Debt (2) | 313 | 792 | 3,007 | 7,145 | 11,257 |
| As at December 31, 2022 | 1 Year | Years 2 and 3 | Years 4 and 5 | Thereafter | Total |
| Accounts Payable and Accrued Liabilities (1) | 6,124 | — | — | — | 6,124 |
| Short-Term Borrowings | 115 | — | — | — | 115 |
| Contingent Payments | 271 | 167 | — | — | 438 |
| Lease Liabilities (2) | 426 | 746 | 596 | 2,889 | 4,657 |
| Long-Term Debt (2) | 401 | 983 | 2,014 | 11,196 | 14,594 |
(1)Includes current risk management liabilities.
(2)Principal and interest, including current portion, if applicable.
| 37. SUPPLEMENTARY CASH FLOW INFORMATION |
|---|
A) Working Capital
| As at December 31, | 2023 | 2022 |
|---|---|---|
| Total Current Assets | 9,708 | 12,430 |
| Total Current Liabilities | 6,210 | 8,021 |
| Working Capital | 3,498 | 4,409 |
As at December 31, 2023, adjusted working capital, which excludes the current portion of the contingent payments, was $3.7 billion (December 31, 2022 – $4.7 billion).
Changes in non-cash working capital is as follows:
| For the years ended December 31, | 2023 | 2022 | ||||
|---|---|---|---|---|---|---|
| Accounts Receivable and Accrued Revenues | 314 | 838 | ||||
| Income Tax Receivable | (295) | (58) | ||||
| Inventories | 216 | (143) | ||||
| Accounts Payable and Accrued Liabilities | (685) | (524) | ||||
| Income Tax Payable | (1,112) | 1,000 | ||||
| Total Change in Non-Cash Working Capital | (1,562) | 1,113 | ||||
| Net Change in Non-Cash Working Capital – Operating Activities | (1,193) | 575 | ||||
| Net Change in Non-Cash Working Capital – Investing Activities | (369) | 538 | ||||
| Total Change in Non-Cash Working Capital | (1,562) | 1,113 | For the years ended December 31, | 2023 | 2022 | |
| --- | --- | --- | ||||
| Interest Paid | 402 | 647 | ||||
| Interest Received | 130 | 78 | ||||
| Income Taxes Paid | 2,595 | 723 | ||||
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 66 | |||||
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
B) Reconciliation of Liabilities
The following table provides a reconciliation of liabilities to cash flows arising from financing activities:
| Dividends Payable | Warrant Purchase Payable | Short-Term Borrowings | Long-Term Debt | Lease Liabilities | |
|---|---|---|---|---|---|
| As at December 31, 2021 | — | — | 79 | 12,385 | 2,957 |
| Changes From Financing Cash Flows: | |||||
| Net Issuance (Repayment) of Short-Term Borrowings | — | — | 34 | — | — |
| Repayment of Long-Term Debt | — | — | — | (4,149) | — |
| Principal Repayment of Leases | — | — | — | — | (302) |
| Base Dividends Paid on Common Shares | (682) | — | — | — | — |
| Variable Dividends Paid on Common Shares | (219) | — | — | — | — |
| Dividends Paid on Preferred Shares | (26) | — | — | — | — |
| Non-Cash Changes: | |||||
| Net Premium (Discount) on Redemption of Long-Term Debt | — | — | — | (29) | — |
| Finance and Transaction Costs | — | — | — | (28) | — |
| Lease Additions | — | — | — | — | 25 |
| Base Dividends Declared on Common Shares | 682 | — | — | — | — |
| Variable Dividends Declared on Common Shares | 219 | — | — | — | — |
| Dividends Declared on Preferred Shares | 35 | — | — | — | — |
| Exchange Rate Movements and Other | — | — | 2 | 512 | 156 |
| As at December 31, 2022 | 9 | — | 115 | 8,691 | 2,836 |
| Changes From Financing Cash Flows: | |||||
| Net Issuance (Repayment) of Short-Term Borrowings | — | — | 58 | — | — |
| Repayment of Long-Term Debt | — | — | — | (1,346) | — |
| Principal Repayment of Leases | — | — | — | — | (288) |
| Base Dividends Paid on Common Shares | (990) | — | — | — | — |
| Dividends Paid on Preferred Shares | (36) | — | — | — | — |
| Payment for Purchase of Warrants | — | (711) | — | — | — |
| Finance and Transaction Costs | — | (2) | — | — | — |
| Non-Cash Changes: | |||||
| Net Premium (Discount) on Redemption of Long-Term Debt | — | — | — | (84) | — |
| Finance and Transaction Costs | — | 2 | — | (19) | — |
| Lease Acquisitions | — | — | — | — | 33 |
| Lease Additions | — | — | — | — | 57 |
| Lease Divestitures | — | — | — | — | (11) |
| Base Dividends Declared on Common Shares | 990 | — | — | — | — |
| Dividends Declared on Preferred Shares | 36 | — | — | — | — |
| Warrants Purchased and Cancelled | — | 711 | — | — | — |
| Exchange Rate Movements and Other | — | — | 6 | (134) | 31 |
| As at December 31, 2023 | 9 | — | 179 | 7,108 | 2,658 |
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 67 | ||||
| --- | --- |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
| 38. COMMITMENTS AND CONTINGENCIES |
|---|
A) Commitments
Cenovus has entered into various commitments in the normal course of operations. Commitments that have original maturities less than one year are excluded from the table below. Future payments for the Company’s commitments are below:
| As at December 31, 2023 | 1 Year | 2 Years | 3 Years | 4 Years | 5 Years | Thereafter | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Transportation and Storage (1) (2) | 2,018 | 1,927 | 1,680 | 1,663 | 1,641 | 15,738 | 24,667 | |||||||||
| Product Purchases | 617 | — | — | — | — | — | 617 | |||||||||
| Real Estate | 57 | 57 | 59 | 63 | 58 | 604 | 898 | |||||||||
| Obligation to Fund HCML | 94 | 94 | 94 | 89 | 52 | 90 | 513 | |||||||||
| Other Long-Term Commitments (3) | 417 | 194 | 184 | 175 | 166 | 965 | 2,101 | |||||||||
| Total Commitments | 3,203 | 2,272 | 2,017 | 1,990 | 1,917 | 17,397 | 28,796 | As at December 31, 2022 | 1 Year | 2 Years | 3 Years | 4 Years | 5 Years | Thereafter | Total | |
| --- | --- | --- | --- | --- | --- | --- | --- | |||||||||
| Transportation and Storage (1) (2) | 1,747 | 2,011 | 1,542 | 1,416 | 1,360 | 13,005 | 21,081 | |||||||||
| Product Purchases | 1,626 | 1,509 | 922 | 922 | 922 | 3,457 | 9,358 | |||||||||
| Real Estate | 48 | 50 | 50 | 50 | 54 | 604 | 856 | |||||||||
| Obligation to Fund HCML | 92 | 105 | 96 | 96 | 91 | 143 | 623 | |||||||||
| Other Long-Term Commitments | 381 | 90 | 75 | 74 | 65 | 395 | 1,080 | |||||||||
| Total Commitments | 3,894 | 3,765 | 2,685 | 2,558 | 2,492 | 17,604 | 32,998 |
(1)Includes transportation commitments that are subject to regulatory approval or were approved, but are not yet in service of $13.0 billion (December 31, 2022 – $9.1 billion). Terms are up to 20 years on commencement. Estimated tolls are subject to change pending review by the Canada Energy Regulator.
(2)As at December 31, 2023, includes $2.1 billion related to long-term transportation and storage commitments with HMLP (December 31, 2022 – $2.2 billion).
(3)The Company acquired $538 million of commitments as part of the Toledo Acquisition on February 28, 2023.
There were outstanding letters of credit aggregating to $364 million (December 31, 2022 – $490 million) issued as security for financial and performance conditions under certain contracts. Subsequent to December 31, 2023, Cenovus entered into a new transportation commitment for $587 million.
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.
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.
| 39. PRIOR PERIOD REVISIONS |
|---|
Certain comparative information presented in the Consolidated Statements of Earnings (Loss) and segment disclosures was revised for classification changes.
In September 2023, the Company made adjustments to ensure the consistent treatment of sales between segments and to correct the elimination of these transactions on consolidation. The following adjustments were made:
•Report Conventional segment sales between segments on a gross basis, which resulted in a reclassification between gross sales and transportation and blending expense.
•Report sales of feedstock between the Oil Sands, Conventional and U.S. Refining segments on a net basis, which resulted in a reclassification between gross sales and purchased product.
Offsetting adjustments were made to the Corporate and Eliminations segment. The above items had no impact to net earnings (loss), operating margin, segment income (loss), cash flows or financial position.
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 68 |
|---|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in $ millions, unless otherwise indicated
For the year ended December 31, 2023
It was also identified that the elimination of sales of diluent, natural gas and associated transportation costs between segments were recorded to the incorrect line item in the Corporate and Eliminations segment. The adjustment resulted in an understatement of operating expense, overstatement of purchased product and an overstatement of transportation and blending expense on the Consolidated Statements of Earnings (Loss). There was no impact to net earnings (loss), operating margin, segment income (loss), cash flows or financial position.
The following table reconciles the amounts previously reported in the Consolidated Statements of Earnings (Loss) and segmented disclosures to the corresponding revised amounts:
| Year Ended December 31, 2022 | |||||||
|---|---|---|---|---|---|---|---|
| Oil Sands Segment | Previously Reported | Revisions | Revised Balance | ||||
| Gross Sales | 34,775 | (92) | 34,683 | ||||
| Purchased Product | 4,810 | (92) | 4,718 | ||||
| 29,965 | — | 29,965 | Conventional Segment | ||||
| --- | --- | ||||||
| Gross Sales | 4,332 | 107 | 4,439 | ||||
| Transportation and Blending | 143 | 107 | 250 | ||||
| 4,189 | — | 4,189 | |||||
| U.S. Refining Segment | |||||||
| --- | --- | ||||||
| Gross Sales | 30,310 | (92) | 30,218 | ||||
| Purchased Product | 26,112 | (92) | 26,020 | ||||
| 4,198 | — | 4,198 | |||||
| Corporate and Eliminations Segment | |||||||
| --- | --- | ||||||
| Gross Sales | (7,464) | 77 | (7,387) | ||||
| Purchased Product | (5,533) | 341 | (5,192) | ||||
| Transportation and Blending | (664) | (511) | (1,175) | ||||
| Operating | (1,270) | 247 | (1,023) | ||||
| 3 | — | 3 | |||||
| Consolidated | |||||||
| --- | --- | --- | --- | ||||
| Purchased Product | 33,801 | 157 | 33,958 | ||||
| Transportation and Blending | 11,530 | (404) | 11,126 | ||||
| Operating | 5,569 | 247 | 5,816 | ||||
| 50,900 | — | 50,900 | |||||
| Cenovus Energy Inc. – 2023 Consolidated Financial Statements | 69 | ||||||
| --- | --- |
Document
Exhibit 99.4
Cenovus Energy Inc.
Supplementary Information – Oil and Gas Activities (unaudited)
For the Year Ended December 31, 2023
(Canadian Dollars)
| DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES TOPIC 932 “EXTRACTIVE ACTIVITIES – OIL AND GAS” (unaudited) |
|---|
The following select disclosures of Cenovus Energy Inc.’s (“Cenovus” or the “Company”) reserves and other oil and gas information have been prepared in accordance with United States (“U.S.”) Financial Accounting Standards Board (“FASB”) Topic 932, “Extractive Activities – Oil and Gas” and the U.S. disclosure requirements of the Securities and Exchange Commission (“SEC”).
All amounts pertaining to Cenovus’s audited Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Unless otherwise noted, all dollars are in millions of Canadian dollars. All references to C$ or $ are to Canadian dollars and references to US$ are to U.S. dollars.
RESERVES DATA
The SEC Modernization of Oil and Gas Reporting final rules require that proved after royalty reserves be estimated using existing economic conditions (constant pricing). Cenovus’s results have been calculated using the average of the first-day-of-the-month prices for the prior twelve-month period. This same twelve-month average price is also used in calculating the aggregate amount of (and changes in) future cash inflows related to the standardized measure of discounted future net cash flows relating to proved oil and gas reserves (“SMOG”). Future fluctuations in prices, production rates, or changes in political or regulatory environments could cause Cenovus’s share of future production from its reserves to be materially different from that presented.
The reserves disclosed are effective December 31, 2023, and were prepared by the independent, qualified reserves evaluators (“IQREs”) McDaniel & Associates Consultants Ltd. and GLJ Ltd. There are significant differences between reserves evaluated under the SEC requirements and those presented in the Company’s Annual Information Form filed under National Instrument 51-101 “Standards of Disclosure for Oil and Gas Activities” (“NI 51-101”). NI 51-101 requires disclosure of before royalties reserves and the associated values using forecasted prices and costs.
The reserves presented in this supplemental information are estimates only. There are numerous uncertainties inherent in estimating quantities of reserves, including many factors beyond the Company’s control. In general, estimates of economically recoverable bitumen, crude oil, natural gas liquids and natural gas reserves and the future net cash flows derived therefrom are based upon a number of variable factors and assumptions, including but not limited to: product prices; future operating and capital costs; historical production from the properties and the assumed effects of regulation by governmental agencies, including with respect to environmental regulations, royalty payments and taxes; initial production rates; production decline rates; and the availability, proximity and capacity of oil and gas gathering systems, pipelines and processing facilities, all of which may vary considerably from actual results.
All such estimates are to some degree uncertain and classifications of reserves are only attempts to define the degree of uncertainty involved. For those reasons, estimates of the economically recoverable bitumen, crude oil, natural gas liquids and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. Cenovus’s actual production, sales, royalty payments, taxes and development and operating expenditures with respect to its reserves may vary from current estimates and such variances may be material. Actual reserves may be greater than or less than the estimates disclosed. For a full discussion of Cenovus’s material risk factors refer to “Risk Management and Risk Factors” in the Company’s annual 2023 Management’s Discussion and Analysis included in the annual report on Form 40-F of which this document forms a part.
Estimates with respect to reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves, rather than upon actual production history. Subsequent evaluation of the same reserves based upon production history will result in variations, which may be material, in the estimated reserves. Canadian provincial royalties are determined based on a graduated percentage scale which varies with prices and production rates. Canadian reserves, as presented on a net basis, assume royalty rates in existence at the time the estimates were made.
The reserves data contained herein is dated February 14, 2024, with an effective date of December 31, 2023.
| Cenovus Energy Inc. | 2 | Supplementary Information – Oil and Gas Activities (unaudited) |
|---|
OIL AND GAS RESERVES INFORMATION
In Canada, Cenovus's bitumen, crude oil, natural gas liquids and natural gas reserves are located in the provinces of Alberta, British Columbia, Saskatchewan and offshore Newfoundland and Labrador. Cenovus's international natural gas liquids and natural gas reserves are located offshore China and Indonesia. Reserve tables presented may not add due to rounding.
Net Proved Reserves (Cenovus Share After Royalties) (1)(2) Average Fiscal-Year Prices
| Bitumen | Crude Oil | Natural Gas Liquids | Natural Gas | Total | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (MMbbls) (3) | (MMbbls) (3) | (MMbbls) (3) | (Bcf) (3) | (MMBOE) (3) | ||||||
| Canada | ||||||||||
| 2022 | ||||||||||
| Beginning of year | 4,409 | 72 | 58 | 1,532 | 4,794 | |||||
| Technical revisions and improved recovery | 79 | (3) | 2 | 42 | 85 | |||||
| Revisions due to price | (469) | 7 | — | 14 | (460) | |||||
| Total revisions to prior estimates | (390) | 4 | 2 | 56 | (375) | |||||
| Extensions and discoveries | 21 | 5 | 3 | 178 | 58 | |||||
| Purchase of reserves in place | 237 | — | — | 2 | 238 | |||||
| Sale of reserves in place | (102) | (1) | (2) | (30) | (110) | |||||
| Production | (154) | (12) | (6) | (200) | (206) | |||||
| End of year | 4,021 | 68 | 55 | 1,538 | 4,399 | |||||
| Developed | 792 | 62 | 45 | 1,208 | 1,100 | |||||
| Undeveloped | 3,229 | 6 | 10 | 330 | 3,299 | |||||
| Total | 4,021 | 68 | 55 | 1,538 | 4,399 | |||||
| 2023 | ||||||||||
| Beginning of year | 4,021 | 68 | 55 | 1,538 | 4,399 | |||||
| Technical revisions and improved recovery | (33) | (2) | (3) | (14) | (40) | |||||
| Revisions due to price | 160 | (3) | (2) | (40) | 148 | |||||
| Total revisions to prior estimates | 127 | (5) | (5) | (54) | 109 | |||||
| Extensions and discoveries | 85 | 4 | 3 | 134 | 115 | |||||
| Purchase of reserves in place | 7 | — | — | — | 7 | |||||
| Sale of reserves in place | — | — | — | (3) | (1) | |||||
| Production | (163) | (10) | (6) | (205) | (214) | |||||
| End of year | 4,077 | 56 | 47 | 1,411 | 4,415 | |||||
| Developed | 781 | 50 | 37 | 1,083 | 1,049 | |||||
| Undeveloped | 3,296 | 6 | 10 | 328 | 3,367 | |||||
| Total | 4,077 | 56 | 47 | 1,411 | 4,415 | |||||
| Cenovus Energy Inc. | 3 | Supplementary Information – Oil and Gas Activities (unaudited) | ||||||||
| --- | --- | --- | ||||||||
| Bitumen | Crude Oil | Natural Gas Liquids | Natural Gas | Total | ||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| (MMbbls) (3) | (MMbbls) (3) | (MMbbls) (3) | (Bcf) (3) | (MMBOE) (3) | ||||||
| China | ||||||||||
| 2022 | ||||||||||
| Beginning of year | — | — | 16 | 382 | 80 | |||||
| Technical revisions and improved recovery | — | — | (1) | 11 | 1 | |||||
| Total revisions to prior estimates | — | — | (1) | 11 | 1 | |||||
| Production | — | — | (4) | (79) | (17) | |||||
| End of year | — | — | 11 | 314 | 64 | |||||
| Developed | — | — | 11 | 314 | 64 | |||||
| Undeveloped | — | — | — | — | — | |||||
| Total | — | — | 11 | 314 | 64 | |||||
| 2023 | ||||||||||
| Beginning of year | — | — | 11 | 314 | 64 | |||||
| Technical revisions and improved recovery | — | — | 1 | (1) | 1 | |||||
| Total revisions to prior estimates | — | — | 1 | (1) | 1 | |||||
| Production | — | — | (3) | (65) | (14) | |||||
| End of year | — | — | 9 | 248 | 51 | |||||
| Developed | — | — | 9 | 248 | 51 | |||||
| Undeveloped | — | — | — | — | — | |||||
| Total | — | — | 9 | 248 | 51 | |||||
| Total Consolidated Entities | ||||||||||
| 2022 | ||||||||||
| Beginning of year | 4,409 | 72 | 74 | 1,914 | 4,874 | |||||
| Technical revisions and improved recovery | 79 | (3) | 1 | 53 | 86 | |||||
| Revisions due to price | (469) | 7 | — | 14 | (460) | |||||
| Total revisions to prior estimates | (390) | 4 | 1 | 67 | (374) | |||||
| Extensions and discoveries | 21 | 5 | 3 | 178 | 58 | |||||
| Purchase of reserves in place | 237 | — | — | 2 | 238 | |||||
| Sale of reserves in place | (102) | (1) | (2) | (30) | (110) | |||||
| Production | (154) | (12) | (10) | (279) | (223) | |||||
| End of year | 4,021 | 68 | 66 | 1,852 | 4,463 | |||||
| Developed | 792 | 62 | 56 | 1,522 | 1,164 | |||||
| Undeveloped | 3,229 | 6 | 10 | 330 | 3,299 | |||||
| Total | 4,021 | 68 | 66 | 1,852 | 4,463 | |||||
| 2023 | ||||||||||
| Beginning of year | 4,021 | 68 | 66 | 1,852 | 4,463 | |||||
| Technical revisions and improved recovery | (33) | (2) | (2) | (15) | (39) | |||||
| Revisions due to price | 160 | (3) | (2) | (40) | 148 | |||||
| Total revisions to prior estimates | 127 | (5) | (4) | (55) | 109 | |||||
| Extensions and discoveries | 85 | 4 | 3 | 134 | 115 | |||||
| Purchase of reserves in place | 7 | — | — | — | 7 | |||||
| Sale of reserves in place | — | — | — | (3) | (1) | |||||
| Production | (163) | (10) | (9) | (270) | (227) | |||||
| End of year | 4,077 | 56 | 56 | 1,659 | 4,466 | |||||
| Developed | 781 | 50 | 46 | 1,331 | 1,099 | |||||
| Cenovus Energy Inc. | 4 | Supplementary Information – Oil and Gas Activities (unaudited) | ||||||||
| --- | --- | --- | ||||||||
| Bitumen | Crude Oil | Natural Gas Liquids | Natural Gas | Total | ||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| (MMbbls) (3) | (MMbbls) (3) | (MMbbls) (3) | (Bcf) (3) | (MMBOE) (3) | ||||||
| Undeveloped | 3,296 | 6 | 10 | 328 | 3,367 | |||||
| Total | 4,077 | 56 | 56 | 1,659 | 4,466 | |||||
| Indonesia (4) | ||||||||||
| 2022 | ||||||||||
| Beginning of year | — | — | 2 | 149 | 27 | |||||
| Technical revisions and improved recovery | — | — | 1 | (7) | — | |||||
| Revisions due to price | — | — | — | (8) | (2) | |||||
| Total revisions to prior estimates | — | — | 1 | (15) | (2) | |||||
| Production | — | — | (1) | (10) | (2) | |||||
| End of year | — | — | 2 | 124 | 23 | |||||
| Developed | — | — | 2 | 124 | 23 | |||||
| Undeveloped | — | — | — | — | — | |||||
| Total | — | — | 2 | 124 | 23 | |||||
| 2023 | ||||||||||
| Beginning of year | — | — | 2 | 124 | 23 | |||||
| Technical revisions and improved recovery | — | — | — | 14 | 2 | |||||
| Revisions due to price | — | — | — | — | — | |||||
| Total revisions to prior estimates | — | — | — | 14 | 2 | |||||
| Extensions and discoveries | — | — | — | 10 | 2 | |||||
| Production | — | — | (1) | (21) | (4) | |||||
| End of year | — | — | 2 | 126 | 23 | |||||
| Developed | — | — | 2 | 126 | 23 | |||||
| Undeveloped | — | — | — | — | — | |||||
| Total | — | — | 2 | 126 | 23 |
(1)Definitions:
(a) “Net” reserves are the remaining reserves attributable to Cenovus, after deduction of estimated royalties and including royalty interests.
(b) “Proved” oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations, i.e., prices and costs as of the date the estimate is made.
(c) “Developed” oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods in which the cost of the required equipment is relatively minor compared to the cost of a new well.
(d) “Undeveloped” reserves are reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.
(2)Estimates of total net proved bitumen, crude oil, natural gas liquids, or natural gas reserves are not filed by Cenovus with any U.S. federal authority or agency other than the SEC.
(3)“Million barrels” is abbreviated as MMbbls, “billion cubic feet” is abbreviated as Bcf, and “million barrels of oil equivalent” is abbreviated as MMBOE.
(4)Amounts represent Cenovus's 40 percent working interest in the Husky-CNOOC Madura Ltd. ("HCML") joint venture. Financial results related to HCML are accounted for under the equity method of accounting for consolidated financial statement purposes.
Changes to Reserves
The explanation of significant year-over-year changes in the Company’s net proved reserves for the years ended December 31, 2023, and December 31, 2022, is set forth below.
Year ended December 31, 2023
The changes to the Company's net proved bitumen reserves in 2023 are explained as follows:
•Technical revisions and improved recovery: Decreases to recovery factors at Christina Lake and Foster Creek, offset by improved recovery performance at Lloydminster thermal resulted in a decrease in net proved reserves of 83 million barrels. Increased forecast capital and operating costs reduced royalties payable for the Oil Sands segment, which resulted in an increase in net proved reserves of 50 million barrels.
•Revisions due to price: Lower bitumen prices reduced royalties payable for the Oil Sands segment, which resulted in an increase in net proved reserves.
| Cenovus Energy Inc. | 5 | Supplementary Information – Oil and Gas Activities (unaudited) |
|---|
•Extensions and discoveries: Regulatory approvals at Foster Creek and Lloydminster thermal increased net proved reserves.
•Purchase of reserves in place: An acquisition in the Oil Sands segment increased net proved reserves.
The changes to the Company's net proved reserves of crude oil, natural gas liquids and natural gas in 2023 are explained as follows:
•Technical revisions and improved recovery: Updates to the Conventional segment development plan were partially offset by improved recovery performance in the Offshore segment, decreasing net proved reserves.
•Revisions due to price: Lower product pricing within the Conventional segment and Lloydminster conventional heavy oil decreased net proved reserves.
•Extensions and discoveries: Development within the Conventional segment increased net proved reserves.
Year ended December 31, 2022
The changes to the Company's net proved bitumen reserves in 2022 are explained as follows:
•Technical revisions and improved recovery: Improved recovery performance at Sunrise and Lloydminster thermal resulted in an increase in net proved reserves of 36 million barrels. Increased forecast capital and operating costs resulted in reductions to royalties payable for the Oil Sands segment, which resulted in an increase in net proved reserves of 43 million barrels.
•Revisions due to price: Increased bitumen prices resulted in higher royalties payable for the Oil Sands segment, which resulted in a decrease in net proved reserves.
•Extensions and discoveries: A regulatory approval at Lloydminster thermal increased net proved reserves.
•Purchase of reserves in place: The acquisition of the remaining 50 percent interest in Sunrise increased net proved reserves.
•Sale of reserves in place: The Tucker asset sale decreased net proved reserves.
The changes to the Company's net proved reserves of crude oil, natural gas liquids and natural gas in 2022 are explained as follows:
•Technical revisions and improved recovery: Within the Conventional segment, improved recovery performance partially offset by updates to the development plan increased net proved reserves.
•Revisions due to price: Within the Conventional segment and Lloydminster conventional heavy oil, changes to product pricing increased net proved reserves.
•Extensions and discoveries: Conventional segment and Lloydminster conventional heavy oil current year development and updates to the development plan increased net proved reserves.
•Sale of reserves in place: The transfer of a 12.5 percent working interest in the White Rose field and satellite extensions and the Wembley asset sale decreased net proved reserves.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
In calculating SMOG, the average of the first-day-of-the-month prices for the prior twelve-month period and cost assumptions were applied to Cenovus’s annual future production from net proved reserves to determine cash inflows. Future production and development costs do not include any cost inflation and assume the continuation of existing economic, operating and regulatory conditions. Future income taxes are calculated by applying statutory income tax rates to future pre-tax cash flows after provision for the tax cost of the oil and natural gas properties based upon existing laws and regulations. The discount was computed by application of a 10 percent discount factor to the future net cash flows. The calculation of SMOG is based upon the discounted future net cash flows prepared by IQREs in relation to the reserves they respectively evaluated, and adjusted to the extent provided by contractual arrangements such as price risk management activities, in existence at year end and to account for asset retirement obligations and future income taxes.
Cenovus cautions that the discounted future net cash flows relating to proved oil and gas reserves are an indication of neither the fair market value of Cenovus’s oil and gas properties, nor the future net cash flows expected to be generated from such properties. The discounted future net cash flows do not include the fair market value of exploratory properties and probable or possible oil and gas reserves, nor is consideration given to the effect of anticipated future changes in crude oil, natural gas liquids and natural gas prices, development, asset retirement and production costs and possible changes to tax and royalty
| Cenovus Energy Inc. | 6 | Supplementary Information – Oil and Gas Activities (unaudited) |
|---|
regulations. The prescribed discount rate of 10 percent may not appropriately reflect future interest rates. The computation also excludes values contributed by Cenovus’s enhancement of the netback price from market optimization activities.
Computation of the SMOG was based on the following average of the first-day-of-the-month benchmark prices for the twelve-month period before the end of the year. Natural gas prices for China and Indonesia reserves are based on various gas sales agreements in place.
| Crude Oil and Natural Gas Liquids | Natural Gas | |||||||
|---|---|---|---|---|---|---|---|---|
| Brent Crude Oil | WTI (1)CushingOklahoma | WCS (2) | Edmonton MSW (3) | Edmonton C5+ | Henry Hub Louisiana | AECO (4) | ||
| (US$/bbl) | (US/bbl) | (C/bbl) | (C/bbl) | (C/bbl) | (US/MMBtu) | (C/MMBtu) | ||
| 2023 | 83.17 | |||||||
| 2022 | 101.24 |
All values are in US Dollars.
(1)WTI is an abbreviation for West Texas Intermediate.
(2)WCS is an abbreviation for Western Canadian Select at Hardisty.
(3)MSW is an abbreviation for Mixed Sweet Blend.
(4)AECO is an abbreviation for Alberta Energy Company.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
| Year Ended December 31, 2023 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ millions) | Canada | China | Total Consolidated Entities | Indonesia | ||||||||||||
| Future cash inflows | 270,046 | 4,005 | 274,051 | 1,494 | ||||||||||||
| Less future: | ||||||||||||||||
| Production costs | 76,463 | 617 | 77,080 | 784 | ||||||||||||
| Development costs | 34,682 | 169 | 34,851 | 2 | ||||||||||||
| Asset retirement obligation payments (1) | 7,382 | 64 | 7,446 | 30 | ||||||||||||
| Income taxes | 34,273 | 720 | 34,993 | 272 | ||||||||||||
| Future net cash flows | 117,246 | 2,435 | 119,681 | 406 | ||||||||||||
| Less 10 percent annual discount for estimated timing of<br> cash flow | 73,666 | 421 | 74,087 | 84 | ||||||||||||
| Discounted future net cash flow | 43,580 | 2,014 | 45,594 | 322 | Year Ended December 31, 2022 | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | |||||||||
| ($ millions) | Canada | China | Total Consolidated Entities | Indonesia | ||||||||||||
| Future cash inflows | 338,151 | 5,298 | 343,449 | 1,516 | ||||||||||||
| Less future: | ||||||||||||||||
| Production costs | 93,888 | 711 | 94,599 | 861 | ||||||||||||
| Development costs | 34,596 | 40 | 34,636 | — | ||||||||||||
| Asset retirement obligation payments (1) | 6,850 | 107 | 6,957 | 36 | ||||||||||||
| Income taxes | 46,420 | 1,008 | 47,428 | 247 | ||||||||||||
| Future net cash flows | 156,397 | 3,432 | 159,829 | 372 | ||||||||||||
| Less 10 percent annual discount for estimated timing of<br> cash flow | 100,553 | 829 | 101,382 | 95 | ||||||||||||
| Discounted future net cash flow | 55,844 | 2,603 | 58,447 | 277 |
(1)Includes future abandonment and reclamation costs associated with existing and future wells having attributed reserves, non-reserves wells and gathering systems, batteries, plants and processing facilities.
| Cenovus Energy Inc. | 7 | Supplementary Information – Oil and Gas Activities (unaudited) |
|---|
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
| Year Ended December 31, 2023 | |||||||
|---|---|---|---|---|---|---|---|
| ($ millions) | Canada | China | Total Consolidated Entities | Indonesia | |||
| Balance, beginning of year | 55,844 | 2,603 | 58,447 | 277 | |||
| Changes resulting from: | |||||||
| Sales of oil and gas produced during the period, net of<br><br>operating costs (1) | (8,848) | (1,022) | (9,870) | (197) | |||
| Extensions, discoveries and improved recovery, net of<br> related cost | 4,990 | — | 4,990 | 38 | |||
| Purchases of proved reserves in place | 60 | — | 60 | — | |||
| Sales of proved reserves in place | (2) | — | (2) | — | |||
| Net change in prices and production costs (1) | (14,192) | 109 | (14,083) | 153 | |||
| Revisions to quantity estimates | (437) | 41 | (396) | 57 | |||
| Accretion of discount | 6,302 | 260 | 6,562 | 35 | |||
| Changes in estimated future development costs | (4,770) | (112) | (4,882) | (15) | |||
| Costs incurred | 3,389 | 3 | 3,392 | 14 | |||
| Other | (1,037) | 198 | (839) | 38 | |||
| Net change in income taxes | 2,281 | (66) | 2,215 | (78) | |||
| Balance, end of year | 43,580 | 2,014 | 45,594 | 322 | |||
| Year Ended December 31, 2022 | |||||||
| --- | --- | --- | --- | --- | --- | --- | |
| ($ millions) | Canada | China | Total Consolidated Entities | Indonesia | |||
| Balance, beginning of year | 36,588 | 2,661 | 39,249 | 204 | |||
| Changes resulting from: | |||||||
| Sales of oil and gas produced during the period, net of<br><br>operating costs (1) | (10,575) | (1,263) | (11,838) | (119) | |||
| Extensions, discoveries and improved recovery, net of<br> related cost | 7,735 | — | 7,735 | 231 | |||
| Purchases of proved reserves in place | 3,194 | — | 3,194 | — | |||
| Sales of proved reserves in place | (2,155) | — | (2,155) | — | |||
| Net change in prices and production costs (1) | 30,271 | 1,362 | 31,633 | (51) | |||
| Revisions to quantity estimates | (3,017) | 40 | (2,977) | (24) | |||
| Accretion of discount | 4,056 | 213 | 4,269 | 34 | |||
| Changes in estimated future development costs | (4,383) | (31) | (4,414) | (35) | |||
| Costs incurred | 2,404 | 4 | 2,408 | 74 | |||
| Other | (1,557) | (14) | (1,571) | (13) | |||
| Net change in income taxes | (6,717) | (369) | (7,086) | (24) | |||
| Balance, end of year | 55,844 | 2,603 | 58,447 | 277 |
(1)On January 1, 2019, Cenovus adopted IFRS 16, “Leases” (“IFRS 16”), which prescribes a different accounting treatment for operating leases than U.S. Generally Accepted Accounting Principles (“US GAAP”). Under US GAAP, the amortization of a right-of-use asset and interest expense related to an operating lease are recorded by nature of the expense on the income statement (production costs). Under IFRS 16, amortization of a right-of-use asset and interest expense are classified as depreciation expense and finance costs, respectively. As a result, changes in SMOG due to the amortization of right-of-use assets and interest payments have been included by Cenovus in “Net change in prices and production costs”.
| Cenovus Energy Inc. | 8 | Supplementary Information – Oil and Gas Activities (unaudited) |
|---|
OTHER FINANCIAL INFORMATION
Results of Operations
| Year Ended December 31, 2023 | |||||||
|---|---|---|---|---|---|---|---|
| ($ millions) | Canada | China | Total Consolidated Entities | Indonesia (1) | |||
| Oil and gas sales, net of royalties, transportation and blending and realized risk management | 12,427 | 1,133 | 13,560 | 243 | |||
| Less: | |||||||
| Operating costs and accretion of asset retirement<br> obligations | 3,773 | 124 | 3,897 | 49 | |||
| Depreciation, depletion and amortization | 3,402 | 464 | 3,866 | 78 | |||
| Exploration expense | 37 | 5 | 42 | 2 | |||
| Operating income | 5,215 | 540 | 5,755 | 114 | |||
| Income taxes | 1,311 | 221 | 1,532 | 46 | |||
| Results of operations | 3,904 | 319 | 4,223 | 68 | |||
| Year Ended December 31, 2022 | |||||||
| --- | --- | --- | --- | --- | --- | --- | |
| ($ millions) | Canada | China | Total Consolidated Entities | Indonesia (1) | |||
| Oil and gas sales, net of royalties, transportation and blending and realized risk management | 14,250 | 1,362 | 15,612 | 155 | |||
| Less: | |||||||
| Operating costs and accretion of asset retirement<br> obligations | 3,836 | 111 | 3,947 | 37 | |||
| Depreciation, depletion and amortization | 3,172 | 546 | 3,718 | 64 | |||
| Exploration expense | 24 | 77 | 101 | — | |||
| Operating income | 7,218 | 628 | 7,846 | 54 | |||
| Income taxes | 1,711 | 157 | 1,868 | 22 | |||
| Results of operations | 5,507 | 471 | 5,978 | 32 |
(1) Financial results related to HCML are accounted for under the equity method of accounting for consolidated financial statement purposes.
| Cenovus Energy Inc. | 9 | Supplementary Information – Oil and Gas Activities (unaudited) |
|---|
Capitalized Costs
| Year Ended December 31, 2023 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ millions) | Canada | China | Total Consolidated Entities | Indonesia (1) | ||||||||||||
| Proved oil and gas properties | 44,342 | 3,083 | 47,425 | 436 | ||||||||||||
| Unproved oil and gas properties (2) | 729 | 9 | 738 | — | ||||||||||||
| Total capital cost | 45,071 | 3,092 | 48,163 | 436 | ||||||||||||
| Accumulated depreciation, depletion and amortization | 16,487 | 1,488 | 17,975 | 157 | ||||||||||||
| Net capitalized costs | 28,584 | 1,604 | 30,188 | 279 | Year Ended December 31, 2022 | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | |||||||||
| ($ millions) | Canada | China | Total Consolidated Entities | Indonesia (1) | ||||||||||||
| Proved oil and gas properties | 40,425 | 3,103 | 43,528 | 432 | ||||||||||||
| Unproved oil and gas properties (2) | 680 | 5 | 685 | — | ||||||||||||
| Total capital cost | 41,105 | 3,108 | 44,213 | 432 | ||||||||||||
| Accumulated depreciation, depletion and amortization | 13,251 | 1,051 | 14,302 | 114 | ||||||||||||
| Net capitalized costs | 27,854 | 2,057 | 29,911 | 318 |
(1) Capital expenditures related to HCML are accounted for under the equity method of accounting for consolidated financial statement purposes.
(2) Unproved oil and gas properties include exploration and evaluation assets for which no proved reserves have been recognized.
Costs Incurred
| Year Ended December 31, 2023 | ||||||||
|---|---|---|---|---|---|---|---|---|
| ($ millions) | Canada | China | Total Consolidated Entities | Indonesia (1) | ||||
| Acquisitions | ||||||||
| Unproved (2) | 31 | — | 31 | — | ||||
| Proved (3) (4) | 11 | — | 11 | — | ||||
| Total acquisitions | 42 | — | 42 | — | ||||
| Exploration costs | 80 | 4 | 84 | — | ||||
| Development costs | 3,389 | 3 | 3,392 | 14 | ||||
| Total costs incurred | 3,511 | 7 | 3,518 | 14 | ||||
| Year Ended December 31, 2022 | ||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| ($ millions) | Canada | China | Total Consolidated Entities | Indonesia (1) | ||||
| Acquisitions | ||||||||
| Unproved (2) | — | — | — | — | ||||
| Proved (3) (4) | 1,621 | — | 1,621 | — | ||||
| Total acquisitions | 1,621 | — | 1,621 | — | ||||
| Exploration costs | 34 | 3 | 37 | — | ||||
| Development costs | 2,404 | 4 | 2,408 | 74 | ||||
| Total costs incurred | 4,059 | 7 | 4,066 | 74 |
(1)Capital expenditures related to HCML are accounted for under the equity method of accounting for consolidated financial statement purposes.
(2)An unproved property is a property to which no proved or probable reserves have been specifically attributed.
(3)A proved property is a property to which proved and probable reserves have been specifically attributed.
(4)Asset retirement costs are included in the year of acquisition.
| Cenovus Energy Inc. | 10 | Supplementary Information – Oil and Gas Activities (unaudited) |
|---|
Document
Exhibit 99.5
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
I, Jonathan M. McKenzie, certify that:
| 1. | I have reviewed this annual report on Form 40-F of Cenovus Energy Inc.; | |
|---|---|---|
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; | |
| 4. | The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have: | |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting 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 generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and | |
| 5. | The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions): | |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting. |
DATED: February 15, 2024
| /s/ Jonathan M. McKenzie |
|---|
| Jonathan M. McKenzie<br><br>President & Chief Executive Officer |
| (Principal Executive Officer) |
Document
Exhibit 99.6
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
I, Karamjit S. Sandhar, certify that:
| 1. | I have reviewed this annual report on Form 40-F of Cenovus Energy Inc.; | |
|---|---|---|
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; | |
| 4. | The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have: | |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting 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 generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and | |
| 5. | The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions): | |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting. |
DATED: February 15, 2024 /s/ Karamjit S. Sandhar
| Karamjit S. Sandhar<br><br>Executive Vice-President &<br><br>Chief Financial Officer<br><br>(Principal Financial Officer) |
|---|
Document
Exhibit 99.7
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
In connection with the annual report of Cenovus Energy Inc. (the “Company”) on Form 40−F for the year ended December 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jonathan M. McKenzie, President & Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
| 1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|---|---|
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
DATED: February 15, 2024
| /s/ Jonathan M. McKenzie |
|---|
| Jonathan M. McKenzie<br><br>President & Chief Executive Officer |
Document
Exhibit 99.8
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Cenovus Energy Inc. (the “Company”) on Form 40−F for the year ended December 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Karamjit S. Sandhar, Executive Vice-President & Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
| 1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|---|---|
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
DATED: February 15, 2024
| /s/ Karamjit S. Sandhar |
|---|
| Karamjit S. Sandhar<br><br>Executive Vice-President &<br><br>Chief Financial Officer |
Document
Exhibit 99.9
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in this Annual Report on Form 40-F for the year ended December 31, 2023 of Cenovus Energy Inc. of our report dated February 14, 2024, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in Exhibit 99.3 incorporated by reference in this Annual Report on Form 40-F.
We also consent to the incorporation by reference in the Registration Statements on Form F-10 (File No. 333-275322), Form S-8 (File Nos. 333-163397 and 333-2511886) and Form-3D (File No. 333-202165) of Cenovus Energy Inc. of our report dated February 14, 2024 referred to above. We also consent to the reference to us under the heading “Interests of Experts” in the Annual Information Form, filed as Exhibit 99.1 to this Annual Report on Form 40-F, which is incorporated by reference in such Registration Statements.
/s/PricewaterhouseCoopers LLP
Chartered Professional Accountants
Calgary, Alberta, Canada
February 15, 2024
PricewaterhouseCoopers LLP
111 5th Ave SW, Calgary, Alberta, Canada T2P 5L3
T: +1 403 509 7500, F: +1 403 781 1825
“PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership.
Document
Exhibit 99.10
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
We hereby consent to the use of and reference to our name and report evaluating a portion of Cenovus Energy Inc.’s oil and gas reserves data, including estimates of proved reserves and probable reserves and related future net revenue as at December 31, 2023, estimated using forecast prices and costs, and the information derived from our report, as described or incorporated by reference in Cenovus Energy Inc.’s annual report on Form 40-F for the year ended December 31, 2023 and Cenovus Energy Inc.’s registration statements on Form F-10 (File No. 333-275322), Form S-8 (File Nos. 333-163397 and 333-251886) and Form F-3D (File No. 333-202165) filed with the United States Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended or the Securities Act of 1933, as amended, as applicable.
McDANIEL & ASSOCIATES CONSULTANTS LTD.
/s/ Michael J. Verney
Michael J. Verney, P. Eng.
Executive Vice President
Calgary, Alberta
February 15 , 2024
2000, Eighth Avenue Place, East Tower, 525 – 8 Avenue SW, Calgary, AB, T2P 1G1 Tel: (403) 262-5506 www.mcdan.com
Document
Exhibit 99.11
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
We hereby consent to the use of and reference to our name and report evaluating a portion of Cenovus Energy Inc.’s oil and gas reserves data, including estimates of proved reserves and probable reserves and related future net revenue as at December 31, 2023, estimated using forecast prices and costs, and the information derived from our report, as described or incorporated by reference in Cenovus Energy Inc.’s annual report on Form 40-F for the year ended December 31, 2023 and Cenovus Energy Inc.’s registration statements on Form F-10 (File No. 333-275322), Form S-8 (File Nos. 333-163397 and 333-251886) and Form F-3D (File No. 333-202165) filed with the United States Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended or the Securities Act of 1933, as amended, as applicable.
Yours truly,
GLJ LTD.
/s/ Jodi L. Anhorn
Jodi L. Anhorn, P. Eng.
President and Chief Executive Officer
Calgary, Alberta
February 15, 2024
1920, 401 – 9th Ave SW Calgary, AB, Canada T2P 3C5 I teI 403-266-9500 I gIjpc.com