Cenovus Energy - Earnings Call - Q3 2025

Transcript

Speaker 3

Good morning, everyone. Thank you for standing by and welcome to Cenovus Energy's third quarter 2025 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one-one on your touch-tone telephone. As a reminder, this call is being recorded. I would now like to turn the meeting over to Mr. Patrick Reed, Vice President, Investor Relations and Internal Audit. Please go ahead, Mr. Reed.

Speaker 1

Thank you, Operator. Good morning, everyone, and welcome to Cenovus Energy's 2025 third quarter results conference call. On the call this morning, our CEO, Jon McKenzie, and CFO, Kam Sandhar, will take you through our results. We will then open the line for Jon, Kam, and other members of Cenovus Energy's management team to take your questions. Before getting started, I'll refer you to our advisories located at the end of today's news release. These describe the forward-looking information, non-GAAP measures, and oil and gas terms referred to today. They also outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus Energy's annual MD&A and our most recent AIF and Form 40F. As a reminder, all figures we reference on the call today will be in Canadian dollars unless otherwise indicated. You can view our results at cenovus.com.

For the question-and-answer portion of the call, please keep to one question with a maximum of one follow-up. You're welcome to rejoin the queue for any other follow-up questions you may have. We also ask that you hold off on any detailed modeling questions. You can follow up on these directly with our investor relations team after the call. I will now turn the call over to Jon. Jon, please go ahead.

Speaker 4

Great. Thank you, Patrick, and good morning to everybody. To begin the call, I'd like to recognize some of our employees for safely achieving a number of critical accomplishments and milestones over the quarter. Coming into this year, we set some very ambitious goals for the company in 2025, and our execution has been near flawless. What makes these achievements even more satisfying is that we have remained focused on the safety of our people, the communities in which we operate, and the environment. For example, at the West White Rose project, we completed some intricate and critical work in the third quarter. That included installing the top sides on the gravity-based structure, making subsea connections at 120 meters below the ocean surface, and completing a turnaround of the Sea Rose FPSO.

These operations require thousands of offshore hours and were completed in one of the most hostile operating environments, the North Atlantic. I'm incredibly proud of our people and their continued commitment to our core values as we meet our goals and milestones. Before I get to the results, I'd also like to take a moment to speak about the MAG acquisition. As many of you are aware, the MAG shareholder vote, which was scheduled to take place yesterday, has been postponed to next Thursday, November 6. The delay is to give time for MAG to respond to a regulatory inquiry related to MAG's consideration of the amended terms of the transaction and related matters. The inquiry is associated with a complaint raised by a former employee of MAG who holds approximately 4,000 shares. We do not expect this inquiry to have any impact on the transaction.

There continues to be very strong support for the transaction from MAG shareholders, with 86% of the shares voted in favor of the transaction. We expect the vote to proceed as planned next week. Cenovus remains resolute in our commitment to this transaction. When completed, this acquisition, combined with the organic growth we are already delivering across our business, is transformational to this company. Subject to shareholder and court approval, we anticipate closing this transaction in November and welcoming the MAG team and moving quickly to capture the identified synergies and beyond. Turning to the quarter, we've spoken about 2025 as being an inflection point for our company, where the investments we've made in our people, our assets, and in the growth of our business start to come through. The third quarter results are a proof point of more to come.

We achieved a highest-ever upstream production of 833,000 BOE/d, highlighted by the best-ever performance of our oil sands assets, which contributed 643,000 bbl/d. At Christina Lake, production was 252,000 bbl/d in the third quarter, supported by the ramp-up of volumes from Narrows Lake. In the quarter, we brought on three well pads at Narrows Lake, which are continuing to ramp up as expected. We expect Christina Lake to sustain or exceed its current production rates in the coming quarters. At Foster Creek, we achieved a production record of 215,000 bbl/d in the quarter. As part of the Foster Creek Optimization Project, we brought on four new steam generators online in July, and they've already supported consistently higher production from the asset, well ahead of schedule. Commissioning of the water treatment and de-oiling facilities is underway and approaching completion. New pads will be brought online in the first quarter of 2026.

We have effectively brought forward a portion of the growth from this optimization project that was really not expected until 2026. We expect to build on the high level of production in the coming quarters as we fully utilize the steam capacity and complete the project. At Sunrise, we executed a turnaround in September, and production was 52,000 bbl/d in the quarter. With turnarounds at both sides of the plant completed in the year and followed by an efficient ramp-up, we expect Sunrise to exit the year around 60,000 bbl/d. The first of the new well pads from the east development area at Sunrise is planned for start-up in early 2026. Development of the high-quality reservoir in this region will deliver the next phase of growth from the asset over the next two years. The Lloydminster Thermals produced 96,000 bbl/d in the quarter.

The assets have performed very well despite 18,000 bbl/d of production from Rush Lake facilities remaining shut in, as strong performance from the other assets in the region offsets some of the lost volumes. At Rush Lake, we have confirmed the integrity of the asset and are working towards a phased restart of production prior to the end of the year, subject to approval by the regulator. We expect to safely ramp up production through 2026. At West White Rose, I'm pleased to say the commissioning is nearly complete, and there has been an extraordinary achievement by everybody involved. We will be drilling from the platform prior to year-end and seeing first oil in the second quarter of next year. Now, moving to the downstream, we had an excellent third quarter.

The Canadian refining business continues to run well with crude throughput of 105,000 barrels per day and a utilization rate of about 98%. In U.S. refining, we delivered record production with crude throughput of 605,000 barrels per day and a utilization rate of 99%. Our assets ran as expected during the quarter with high rates of utilization and availability. This, in conjunction with seasonally stronger crack spreads, generated positive funds flow for the business. Cost control in the downstream has been a focus area for the business, and we continue to see unit cost trend downward towards competitive benchmarks. With the sale of WRB Refining, which closed at the end of the quarter, our downstream business is now fully owned, operated, and within our control. Now, I'll turn it over to Kam to walk through some of the financial results.

Speaker 7

Thanks, Jon. Good morning, everyone. In the third quarter, we generated $3 billion of operating margin and approximately $2.5 billion of adjusted funds flow. Operating margin in the upstream was approximately $2.6 billion, an increase of around $450 million from the second quarter, driven by our strong operating performance and higher realized pricing in the oil sands. Oil sands non-fuel operating costs of $9.65 per barrel decreased quarter over quarter due to lower turnaround activities and higher production volumes. We continue to make progress on reducing operating costs across the upstream business and expect to see further reductions as we bring on the West White Rose project, realize the full benefit of the Foster Creek Optimization Project, and continue to see steady ramp-up at Sunrise. Our downstream business demonstrated strong performance in the quarter with an operating margin of $364 million.

This included $88 million of inventory holding losses and $38 million of turnaround expenses, partially offset by a $67 million benefit related to the receipt of the small refinery exemption at Superior. In the U.S. refining, per unit operating costs excluding turnaround expenses were $9.67 a barrel, a decrease of $0.85 a barrel from the second quarter and over $3 a barrel relative to the same quarter last year. The reduction in OpEx was largely driven by performance from our operated assets, which delivered operating costs of approximately $9.90 per barrel in the third quarter. Adjusted market capture for the U.S. refining business was 65% in the quarter. This was supported by a capture rate of 69% from our operated assets, which benefited from the small refinery exemption at Superior and increased refined product exports from the dock at Toledo.

The sale of our 50% interest in WRB Refining closed at the end of the third quarter. In addition to the cash proceeds of $1.8 billion received on October 1, the transaction eliminated Cenovus's share of drawn credit facilities associated with the joint venture of $313 million, resulting in a total value received of $2.1 billion based on preliminary closing adjustments. Results from our U.S. refining business will only include our operating assets beginning in the fourth quarter, and we have updated our 2025 guidance to reflect the sale of Wood River and Borger. Capital investment of $1.2 billion was driven by a consistent level of sustaining activity across the business, in addition to the continued advancement of our key growth projects. With the West White Rose project now substantially complete, we continue to expect our growth capital to come down significantly in 2026.

At the end of the third quarter, our net debt was approximately $5.3 billion prior to the receipt of the $1.8 billion of cash proceeds from the sale of WRB. We returned $1.3 billion to shareholders in the quarter through dividends and share buybacks. We took the opportunity to allocate more capital to share repurchases in the third quarter following the announced sale of WRB. This included the purchase of about 40 million shares at an average price of $22.75 per share. The total value of the share repurchase in the quarter was $918 million, which is approximately $175 million higher than our excess funds flow in the quarter. Subsequent to the quarter and through October 27, the company purchased another $409 million worth of shares, or about 17 million shares.

As Jon noted, following the approval by MAG shareholders, we expect the acquisition of MAG Energy to close in November. Total consideration for the transaction is expected to be a split of 50% cash and 50% Cenovus shares. This equates to a maximum of approximately $3.8 billion in cash and the issuance of 160 million Cenovus shares on a fully pro-rata basis. Pro forma, our balance sheet remains strong with less than one times net debt to cash flow. Going forward, we'll continue to be opportunistic with our share buybacks while living within the guidelines of our financial framework. As we head into 2026, our major projects are nearing completion and our growth capital is coming down. Combined with the strength in our balance sheet, the business is positioned well to support our near-term growth plans and remain resilient even at the bottom of the cycle commodity price.

I'll now turn the call back to Jon for some closing remarks.

Speaker 4

Great. Thank you, Kam. Now, as I mentioned earlier, we set some ambitious goals for ourselves and the company for this year, and I couldn't be more proud of the way our people have taken up the challenge. We've largely completed our growth projects and are seeing the benefits of higher production, with more to come over the future quarters. Our downstream business has been relentless in driving performance across the portfolio of assets. The sale of WRB gives us full operational, commercial, and strategic control of our downstream business while monetizing our non-operated business at an attractive price. Our business is blessed with a deep inventory of development opportunities at low supply costs, below $45 WTI, and underpinned by a fortress balance sheet. We are focused on aligning our strategy, business plans, and priorities, and look forward to building on a quarter-over-quarter growth and value for the foreseeable future.

With that, I'm happy to answer your questions.

Speaker 3

Thank you. If you have a question at this time, please press the star one-one on your touch-tone telephone. We ask that you please limit yourself to one question and one follow-up. One moment for our questions. Our first question comes from the line of Menno Hulshof from TD Securities.

Good morning, and thanks for taking my question.

Speaker 4

Good morning, Manav.

Good morning, Jon. Just a question on portfolio streamlining. If we assume that the MAG deal closes towards the middle of November, like you've talked about, how should we be thinking about asset sale potential in the context of what would be a more levered balance sheet? I know you get this question a lot, but any updated thoughts there would be helpful.

One of the things that we are always very cognizant of, Manav, is the amount of leverage we keep on our balance sheet. We've always run with an under-levered balance sheet, which allows us to do transactions like this very comfortably. There is no burning platform to need to delever after doing this transaction. We're very comfortable with the level of debt that we're going to be taking on to get this deal done. Through time, we'll get back to the $4 billion of net debt, but there is no urgency to do asset sales or something like that in an effort to get there. That being said, we always look at the portfolio. We always think about how we want to position ourselves, and if opportunities arise, we're always live to those. Certainly, there's nothing that would say that we need to do something tomorrow.

We would never do a transaction like this if we felt it was going to corrupt the balance sheet and put our equity holders in harm's way.

Great. Thanks for that, Jon. Maybe moving on to the downstream, we're sort of moving into November now, sort of one-third of the way through the quarter. How would you frame the setup for U.S. downstream for Q4? On a related note, how much should we expect market capture to be impacted with the Wood River Border assets no longer in the mix? I'm guessing it's no more than, call it, 1% to 2%, but any thoughts there would help.

In Q3, our market capture was actually higher in our operated assets than in the non-operated assets. I've got Eric Zenford with us this morning, so maybe I'll turn that question over to him to see how he's thinking about Q4 and market capture.

Speaker 7

Yeah. Thanks, Jon. Thanks for the question, Manav. I'd say I certainly think the third quarter is a testament to the work that the team has done and I think has been something that has really been a focus area for the year. Really proud of the results of what we're seeing in the third quarter. As we look at the fourth quarter, I think there's a couple of things I think about in terms of the underlying performance. Continue to be encouraged by the trajectory. Reliability improvements that we've made have really given us a foundation. I think the cost focus that we've had throughout the year and the results that we're seeing with the lower cost base is something that, again, we continue to focus on and will continue to be something that we emphasize going forward.

Anytime you get into the fourth quarter, you expect margins to start to come off, cracks start to weaken. We're already seeing some of that. There's some strength right now, but I think having a strong business and strong underlying performance gives us the ability to kind of weather through some of the market challenges that you inevitably expect in fourth quarter and then also in the first quarter as well with the Pad 2 region specifically. In terms of the market capture, I'd just maybe emphasize, re-emphasize what Jon shared. That has been a continued area of focus for us. A number of things that we've worked to really help strengthen our market capture. The U.S. operated portfolio really outperformed the collective portfolio in terms of what we saw in market capture.

Continue to be encouraged, but it's something we are continuing to focus on and trying to figure and look for opportunities to grow that market capture even more through our synergy opportunities as well as accessing some markets where we can have some higher net backs and better product placement.

Thanks to you both. I'll turn it back.

Speaker 4

Great. Thanks, Manav.

Speaker 3

Thank you. One moment for our next question. Our next question comes from the line of Patrick O'Rourke from ATB Capital Markets.

Hey, good morning, guys. Thanks for taking my question. Maybe just to sort of continue on the downstream theme there from Manav. Just wondering, now with the fully operated portfolio, with the integration in the kits, sort of what the flexibility is going forward in terms of the product slate. It's a little bit lower on, call it, diesel distillate yield than maybe some of your Canadian peers. Is there an ability to raise those things, capture premium products? You've spoken to pushing product into more premium markets, Eastern Canada, etc. What progress you've made on that so far?

Speaker 7

Yeah. Thanks, Patrick. It's a great question. In terms of the portfolio, I think one of the things I'm really excited about is with the opportunities of the U.S. portfolio, I think particularly around the synergies. Each refinery has its unique configuration that allows us to maximize the value. One of the things we've really started to lean into is how do we optimize across the entire portfolio and how do we get the best product yield across the portfolio, not just asset by asset, but really thinking about it at a portfolio level. I think that gives us a tremendous opportunity. I can think particularly in the Ohio Valley area, where we're able to optimize, whether it's our premium gasoline production, whether it's balancing our distillate feed stocks and maximizing our distillate production.

Truly an area where we're continuing to explore and we certainly see some potential benefits and also the opportunities to do some investments in the future to look at how do we continue to make the best products from our kit. In terms of the second part of your question on accessing the markets, it continues to be an area of focus. Pad 2 is, we think, a really good region for us, but the opportunity to place products outside of Pad 2 and find more advanced markets is really important to our strategy.

I would point to we've made significant progress in how we're managing the Toledo Marine facility, and that has given us the ability to put products into a number of different regions outside of Pad 2, whether it's into the Canadian markets, whether it's into upstate New York, or whether it's into other regions on the Great Lakes. Tons of opportunities there. We're really excited about the opportunity to further explore that and see great upside there.

Okay. Great. In terms of free cash flow allocation priorities, with the initial MAG transaction, you came out with sort of a formula in terms of allocation of balance sheet versus shareholder returns, 50%, then 75%, finally 100%. Today's updated deck just really speaks to the 100%. You said it wouldn't necessarily be formulaic on a month-by-month, quarter-by-quarter basis, but maybe if you could comment on the game plan in terms of allocation today between delevering and share buybacks.

Speaker 4

Sure, Ken. You've done a lot of work on this. Why don't you take this one? Yeah. So, Patrick, I would kind of separate sort of from the MAG transaction to what we're doing today. Obviously, we spent the last year, even longer than that, getting the balance sheet to where we are today, which is at that $4 billion target. Putting MAG aside for a second, I would say the plan would be to return 100% of our excess free cash flow because we are at our long-term debt level. We'll continue to see that as a really good opportunity today, and we'll continue to utilize our free cash flow to return that cash back to shareholders.

I'd say for now, given where the share price is and we continue to see us as an attractive place to deploy capital, you should expect that excess free cash flow to go towards share repurchases. Obviously, as we get to the point where MAG does close, which we still expect here in November, we will adjust that framework to be a bit more balanced with deleveraging and shareholder returns. The plan would be, as we bring the debt back down to around that $6 billion, we'll be kind of around 50/50. As you pointed out, it's not going to be so prescriptive and formulaic. We'll be thoughtful about how much we put on the balance sheet and how much we repurchase shares. Some of that will depend on commodity prices and free cash flow, but think of those as guidelines versus formulas going forward.

I think overall, the goal would be to get back down to the $4 billion. That is still our ultimate target. We have an approach where we want to make sure we get the balance sheet back to that $4 billion. Obviously, our cash flow base, our growth we've got, plus the plan with the MAG assets will put the company in a really good position from a leverage point of view. We view our balance sheet as being something that's going to stay pristine, and it allows us flexibility and opportunity like we've been able to pursue on the MAG transaction.

Okay, thank you very much.

Thanks, Patrick.

Speaker 3

Thank you. One moment for our next question. Our next question comes from the line of Alexa Petrick from Goldman Sachs.

Speaker 4

Good morning, Alexa.

Speaker 3

Hey, morning. Wanted to ask, maybe switching gears, as we think about West White Rose, you've made a lot of progress there. What are some of the gating items? Any early thoughts on what that production path could look like for 1H 2026 versus 2H?

Speaker 4

Yeah. We haven't given guidance for 2026, 2027, and 2028 yet. What we have said publicly about West White Rose is that we are largely through commissioning that project now, and we'll be drilling well prior to year-end with first production expected in early second quarter 2026. That still remains the direction of travel. Andrew, maybe you could just provide a little bit more detail on where we are and what that path might look like.

Yeah. No. Thank you, Alexa. Good morning. Maybe to go a little bit back in time and just catch up too. Obviously, in July, we placed the topsides on top of the CGS. As Jon said, we're deep into the commissioning and startup activities. That actually included all the subsea work. We connected the West White Rose platform to the sea rows in terms of all the pipeline work, etc. We're going to be drilling by year-end and then indeed first production in Q2 of 2026. In terms of production ramp-up, we're going to drill roughly five wells per year. It's roughly a straight line from 2026 through to 2028. What we've said is in 2028, gross volume should be around 80,000 bbl/d, which net Cenovus share is roughly 45,000 bbl/d, Alexa.

Speaker 3

Okay, that's helpful. I recognize it's still a bit early, but you've talked about a significant amount of growth CapEx coming off next year. Any early thoughts on what that magnitude could look like? What are some maybe other offsetting considerations we should be keeping in mind?

Speaker 4

Yeah. Where we've really guided the market, and we'll formalize this when we come out with our budget in December. If you look at spending the last couple of years, we've been around $5 billion Canadian, which would include somewhere around $1.5, $1.7 billion worth of growth capital. What we've been guiding to is 2026 will look different with all of these growth projects kind of rolling off the agenda. What you should be thinking about is on an unaffected basis, not including MAG, we would be around $4.2 billion. Take out WRB from that, kind of brings you to around $4 billion. That's kind of where we think the budget pre-MAG is going to sit. We've also suggested that in 2026, when you add in MAG's assets, we would probably be adding about another $800 million for sustaining and growth capital on the MAG assets in 2026.

Maybe I've really just already given you the budget for 2026 capital. That's kind of what we've been saying, and I think it's very consistent with where we've been taking the market over the last few months and years.

Speaker 3

Okay. That's very helpful. I'll turn it back. Thank you. Thank you. At this time, we have no questions in the queue. We will wait a minute to give you the chance to connect with us if you do have a question. I would like to remind you that if you are on the phone and wish to ask a question, please press the star one-one. Our next question comes from the line of Manav Gupta from UBS.

Hi. I am so sorry about this. It was UBS IT issues. I wanted to ask you, there are a number of organic growth projects which you are pursuing which could deliver over 100,000 barrels of organic volume growth on top of MAG. Can you update us what's the progress over there? How are those projects progressing? Thank you.

Speaker 4

Yeah, I'm not sure where the 400,000 barrels came from, Manav.

No, $100,000. $100,000.

Sorry, I thought you said 4. You kind of worried me. I thought maybe our messaging had been confused.

No, $100,000, sir.

Yeah. What we've been guiding the market to is about 150,000 barrels of growth. It really comes from heavy oil, conventional, and offshore, so right across our portfolio. On the East Coast, as Andrew mentioned, we look to ramp up the West White Rose project to about 45,000 to 50,000 barrels a day by 2028. That growth starts in 2026, and it progresses linearly through 2026, 2027, and into 2028. That's kind of the biggest piece of the growth profile. What we're seeing in Narrows Lake with the tie back to Christina Lake is the 20,000 to 30,000 barrels a day starting to materialize there. You'll see Christina Lake in that 250,000 to 260,000 range. We talked about adding 80,000 barrels a day of steam capacity at Foster Creek, which would add about 30,000 barrels a day to that asset.

Today, we're already seeing about 20 of that with the early steam that we brought on in Q3. You should see that continue to ramp up in 2026 as we bring on well pads and finish the water handling and de-oiling sections of that growth. In Sunrise, we're just getting into what we call the V pads. These are in the eastern region of Sunrise. These are some of the most prolific pads that we've got in our inventory. We expect to see production grow from 55,000 barrels a day to close to 75,000 over the next couple of years at Sunrise. The other growth comes from our conventional and cold heavy businesses. What you'll see from us as we progress through time and get through 2026, 2027, and into 2028 is production will increase into that kind of 950,000 barrel a day range.

Thank you. Very helpful. My quick follow-up here is during the quarter, the buyback was very strong. The buyback went up materially. So did the net debt. I'm just trying to understand, was this just a timing issue where the PSX deal had been announced and those cash flow seeds are probably coming in somewhere in the fourth quarter? That's why the buyback and the net debt went up at the same time. If you could clarify on that.

Sure. Manav, it's Kam. I think one thing just to keep in mind is our reported net debt at the end of September was $5.25 billion. That did not give consideration to the $1.8 billion that we brought in for the sale of Wood River and Borger. Shortly after quarter end, we dropped back down to $4 billion. What I would say is we announced the sale back in early September. We very intentionally, obviously, knew the timing of closing and when we would get the cash. We actually accelerated some of our buyback program through September and in October. I think what I would tell you is I think we're going to continue to steward towards that $4 billion going forward. Obviously, the MAG transaction, when that closes, will change that.

I think to the extent that we can, we'll continue to use 100% of excess free cash flow to buy back shares. The goal is to kind of hold the debt in and around that $4 billion. Obviously, the reported debt number at the end of September did not have or did not reflect the proceeds we received from the sale.

That's exactly what I thought. It was just a timing issue, the buyback happening in Q3 and the proceeds coming in a little later. Thank you so much for taking my questions.

Great. Thanks, Manav.

Speaker 3

Thank you. One moment for our next question. Our next question comes from the line of Patrick O'Rourke from ATB Capital Markets.

Speaker 4

Welcome back, Patrick.

Thanks for taking me again. Just wanted to kind of build on the comments there with respect to Narrows. In the public data, we're seeing that sort of in the 15,000 to 16,000 in September, so getting close to the low end of that range. A bit of differentiation on well performance. We're only working with September here. You guys have the hindsight of more recent data, I would assume, close to through the month of October. Just wondering how well performance is trending relative to tight curve and any timeframe around when you could get to the bottom of that 20,000 range.

Yeah. I'm going to turn this over to Andrew to give some detail. We started steaming two well pads back in July and brought on about 18 wells on the X5 and 6 pads. We're currently steaming the third pad, and we brought on, I think, six of eight of those well pairs. These are ramping up as expected. Andrew, you're all over this every day. What do you have to color.

Yeah. Patrick, we're totally on top of this. We're seeing exactly what we expected from those wells and that they are strong. Without giving too many numbers, I can tell you here that production in October is now up into the 20-something thousand barrels a day, $22,000, $23,000 barrels a day. We're producing from three pads. We're ensuring that we got great conformance across all of those pads. Here in early Q1 of next year, we'll bring the fourth pad on. We're very comfortable and very confident in the performance we're seeing at Narrows Lake and ultimately in the delivery of that growth of the Christina Lake asset.

Yeah, okay. Thank you very much.

Great. Thanks, Patrick.

Speaker 3

Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Jon McKenzie.

Speaker 4

Great. Thank you, operator. I think we're grateful and surprised there were no questions about MAG. Be that as it may, this concludes our conference call. Thank you for joining us. As always, we really appreciate the interest in the company. Thank you to all and have a great day.

Speaker 3

This concludes today's program. You may all disconnect. Thank you for participating in today's conference and have a great day.