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Crude curtailment boosts Albertan producers' profits

Higher prices more than offset Western Canada restrictions on production

Canadian independents Cenovus Energy and Canadian Natural Resources Limited (CNRL) have won big since Alberta's crude curtailment programme began in January, with both posting strong second quarter profits.

Executives from the two firms were among the loudest voices lobbying the Alberta government to adopt a crude curtailment programme last autumn, after Western Canadian oil prices fell through the floor. Western Canadian Select dropped from a peak above $55 in May to a trough below $13 in November—due to a lack of route-to-market capacity from the region.

CNRL wanted higher crude prices so it would have the cashflow to continue purchasing oil sands assets, available at bargain-basement prices. Cenovus needed higher prices to avoid becoming a takeover candidate itself; it had been bleeding cash since its 2017 acquisition of oil sands assets from US independent ConocoPhillips.

The return to buoyant profits allowed CNRL in May 2019 to purchase Oklahoma-based Devon Energy's Canadian assets, while Cenovus has concentrated on paying down debt.

CNRL and Cenovus have also cut capital spending this year. There is little point adding productive capacity with Alberta crude in curtailment, a continuing lack of pipeline and crude-by-rail capacity exiting Western Canada, and regional natural gas prices at very low levels.


CNRL's Q2 profit beat analysts' estimates, with net earnings growing to C$2.83bn ($3.77bn), compared to C$838mn in Q1 and C$982mn in the second quarter of 2018. CNRL's profit in the first half of this year nearly matches the price it paid to acquire Devon Energy's Canadian assets—C$3.79bn compared to C$3.78bn—although this was a coincidence as the acquisition was mainly funded with three-year debt.

CNRL wanted higher crude prices so it would have the cashflow to continue purchasing oil sands assets

CNRL's second quarter profit was bolstered primarily by higher crude prices and lower capital spending, more than offsetting the lower production volumes due to curtailment. The company's capex—excluding the Devon acquisition—declined to a mere $345mn in Q2, roughly a third of the amount it spent in previous quarters. Production averaged 1.03mn bl/d oe, similar to the first quarter, but down almost 25,000bl/d oe year-on-year.

CNRL appears to have a greater preference for growing crude production through acquisition rather than the drill bit, or rather steam shovel. According to Jon Morrison, executive director of institutional equity research at financial services firm CIBC Capital Markets, CNRL's purchase price for Devon Canada "is well below replacement cost".


Cenovus also reported a strong profit in the second quarter, following a relatively decent first quarter, allowing it to repay a significant amount of debt over the first half of the year. The company's net earnings jumped to C$1.78bn in Q2, compared to C$110mn in the first quarter and a loss of C$418mn in the second quarter of 2018.

For the first half of the year, Cenovus' capital spending declined to C$565mn, roughly two-thirds of the level of the same period of 2018. Output was 443,318bl/d oe in the second quarter, similar to Q1, but down from 518,530bl/d oe in the second quarter of 2018.

On the company's Q2 earnings call in July, Cenovus CEO Alex Pourbaix highlighted the debt reduction the company has achieved so far this year. Cenovus repaid C$1.6bn of long-term debt in the first half, bringing net-debt down to about C$7bn. Pourbaix's goal is to bring it down to C$5bn, at which point the company will again be eying acquisitions.

Investors have been wary of Cenovus' debt levels since it bought ConocoPhillips' oil sands assets for C$17.7bn in May 2017. That was followed by six consecutive quarters of losses—totaling C$3.76 bn—culminating in a C$1.35bn loss in the fourth quarter of last year.

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