After ‘near-death experience,’ Cenovus Energy pauses on growth until new pipelines come online

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CALGARY — The cyberattack that knocked out the Colonial Pipeline serving 14 U.S. states showcased how gasoline and diesel demand has been steadily climbing within the U.S. for months, and establishing a bumper 12 months for built-in oil firms equivalent to Cenouvs Vitality Inc..

“Even earlier than this Colonial concern, we had actually seen the utilization of our refineries climbing via Q1 and definitely into Might,” Cenovus president and CEO Alex Pourbaix mentioned in an interview with the Monetary Submit following the corporate’s annual shareholders’ assembly. Greater utilization at its 4 refineries and an upgrader comes at an opportune time for Cenovus, which struck a blockbuster $9-billion acquisition of Husky Vitality final 12 months. The corporate has built-in 70 per cent of its belongings with Husky, Pourbaix mentioned.

Pourbaix, whose firm now has refinery belongings in Saskatchewan, Wisconsin, Ohio, Illinois and Texas, mentioned that if the Colonial outage had persevered right into a second week, he would have anticipated a good greater draw on refined merchandise like gasoline and diesel from his firm’s refineries within the U.S. Midwest.

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Within the aftermath of the Colonial shutdown, shoppers rushed to gasoline stations alongside the U.S. East Coast to refill jerry cans and, in some circumstances, rubbish luggage and rain barrels with gasoline. In some elements of the southern U.S., fights broke out at gasoline stations.

Although the pipeline shutdown solely lasted a number of days, the occasion highlighted the rising demand for gasoline and diesel within the U.S., the place demand for fuels is predicted to leap heading into the primary main summer time driving season for the reason that COVID-19 pandemic started in early 2020. All of this bodes nicely for Cenovus, which was among the many most fiscally weak of the foremost Canadian oil firms final 12 months.

“The U.S. actually appears to be conclusively popping out of its pandemic and mobility is returning to regular. We’re seeing fairly a pull on refined merchandise and our margins have expanded considerably over the place they had been even a pair months in the past,” Pourbaix mentioned.

Spending Temptation

As oil costs have risen over the past 12 months, and refining margins enhance because the North American financial system re-opens, Cenovus and different massive Canadian oil producers are returning to profitability in an enormous method. Analysts say the 4 largest firms within the sector are poised to document over $15 billion in free money stream over the course of 2021 given the long run prospects for the value of oil.

The corporate pulled in internet earnings of $220 million within the first quarter, a reversal from the roughly $1.8-billion internet loss it recorded throughout the identical interval a 12 months earlier. Within the first quarter, Cenovus generated $594 million in money stream in extra of its bills.

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The trade has heard loud and clear from traders that capital self-discipline is necessary

Cenovus president and CEO Alex Pourbaix

With cash flooding in for Cenovus in addition to Suncor Vitality Inc., Canadian Pure Sources Ltd. and Imperial Oil Ltd., the temptation to spend it should develop into more and more tough to withstand, however analysts say resisting that temptation will likely be crucial to rescuing their nonetheless beleaguered share costs. Cenovus’s share value stood at $13.626 firstly of 2020, however by March of that 12 months it had descended to $2.35. It’s at the moment buying and selling round $9.70 — a 311 per cent leap from its backside, however nonetheless 26 per cent decrease than its pre-pandemic value.

Eight Capital analyst Phil Skolnick estimates that, given the oil value trajectory, Canadian Pure will lead the Canadian oil trade this 12 months in delivering greater than $8 billion in free money, or between $6 billion and $6.5 billion after it pays dividends. Suncor is predicted to publish $5.5 billion in free money stream after dividends, adopted by Cenovus with between $3 billion and $3.5 billion, after which Imperial Oil Ltd., with $2 billion in free money stream after dividend funds.

These enormous windfalls of money additionally include a fantastic urge to spend for an trade with a “horrible, horrible observe document relating to (capital) self-discipline,” mentioned Skolnick, who has been masking oil and gasoline equities for the reason that late ‘90s.

There’s additionally an higher boundary on how a lot new oil manufacturing these firms can deliver into the market as a result of there may be nonetheless a restrict on pipeline capability out of Western Canada regardless of Enbridge Inc. ending work on the 760,000 barrels per day Line 3 pipeline alternative.

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Till the Trans Mountain pipeline growth is full in 2022 or late 2023, Skolnick doesn’t anticipate to see oil producers spend on considerably boosting manufacturing.

“You actually can’t develop except you’re prepared to tackle rail and no one needs to make use of rail for a everlasting resolution — it’s there for insurance coverage functions,” Skolnick mentioned.

Regardless of proudly owning an oil-by-rail loading facility in Alberta as an insurance coverage coverage in opposition to pipeline disruptions, Cenovus is adamant that his firm gained’t enhance spending this 12 months. “There may be nothing that’s going to maneuver us off our capital finances for this 12 months and the steering that we gave,” he mentioned.

“The trade has heard loud and clear from traders that capital self-discipline is necessary and that in the end the return of money or worth to shareholders is necessary,” Pourbaix mentioned. “One of many hallmarks of this restoration you’re seeing within the upstream sector is the self-discipline that Cenovus and different firms have proven.”

Certainly, executives on the 4 greatest Canadian oil producers have repeatedly mentioned they won’t enhance spending even within the face of upper oil costs, however it should take greater than guarantees to win traders again which have shunned the sector.

“They undoubtedly have a foul fame that takes greater than 1 / 4 to restore,” mentioned Andrew Byrne, director of fairness analysis, North American E&Ps at IHS Markit Vitality. “They’re going to have to stay to it and train some self-discipline to win some folks again. There’s a variety of ‘profitable again’ that you want to do.”

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Byrne mentioned he expects Canadian oil producers to indicate extra capital self-discipline this 12 months than these within the U.S., whose historical past with returning cash to shareholders lately has been particularly poor.

“Traders have been hammering producers to be disciplined and principally blaming North American oil producers for the collapse in oil costs since 2015,” he mentioned.

Cenovus has mentioned it plans to drive its debt ranges right down to $10 billion by the top of this 12 months. Canadian Pure and Suncor have additionally set debt discount targets. All of those targets have to be achieved earlier than these firms embark on new development plans.

“All people went via a really difficult — nearly a near-death expertise – in 2020,” Pourbaix mentioned,including that the corporate’s focus is on repairing its stability sheet and all the trade is cautious to not rush out and drill extra wells, which might upset the restoration.

• Electronic mail: gmorgan@nationalpost.com | Twitter: geoffreymorgan