Cenovus Energy Slashes Its Capital Budget By 15% For 2015

The Canadian energy giant and one of the fastest growing companies in this space, Cenovus Energy Inc. (CVE), recently announced that it was going to slash its capital budget spending by 15%, citing low and volatile oil prices as the reasons for doing so. The company also plans to hold the line on hiring for the next fiscal.

Management comments


"What I really want to see is stability return to the marketplace," Cenovus President and CEO Brian Ferguson said in a telephone interview Thursday. Cenovus was the latest in a string of Canadian energy companies to unveil reduced spending plans for next year following the drop in oil prices.

In a conference call announcing its $2.5 billion to $2.7 billion capital budget for 2015, Mr. Ferguson said, "We have never laid staff off," but the company would not hire additional employees next year. "What we are expecting is we're going to hold our head count level - we will not be increasing our headcount. We will be looking at how and where we allocate staff," he said.

Recent happenings In the company

Since Cenovus split from Encana Corp. in 2009, the company has seen staff levels jump 59% to 3,544 employees from 2,221, the company's annual information forms show.

Next year, however, Mr. Ferguson said Cenovus will be reallocating existing staff from Calgary to the parts of the company that will grow - those being the expansion phases at its Christina Lake and Foster Creek oilsands plants - rather than continuing to expand its workforce. At the same time, Cenovus is slowing the development of its planned future oilsands projects at Narrows Lake, Telephone Lake and Grand Rapids as a result of the recent collapse in oil prices.

The West Texas Intermediate benchmark price for oil dropped below US$60 per barrel last week, hitting another 52-week low and closing at US$59.95 per barrel at the day-end. Since its peak in June, the prices are off 40%.

"The recent volatility in world oil prices is creating a challenging environment to set plans for 2015," Mr. Ferguson said in announcing his company's budget. He said the company plans to maintain its dividend "through these difficult times."

Cenovus said it would be able to fund its committed capital with internal cash flow if WTI oil prices averaged US$65 per barrel next year. At the same time, the company anticipated a 29% drop in cash flows to between $2.6 billion and $2.9 billion in 2015, compared with an expected $3.8 billion to $3.9 billion in 2014.

Peters & Co. Ltd. said in a note that North American oil and gas companies' total cash flow would drop 25% next year as a result of plummeting oil prices. "We expect the Canadian producer group to generate $53 billion of cash flow in 2015, the lowest level since 2009," the firm said.

RBC Capital Markets analyst Matthew Kolodzie called Cenovus' budget "prudent" and that the company's operating costs at its two existing oil sands projects are below US$20 per barrel.

Mr. Kolodzie also noted that future development costs for Christina Lake and Foster Creek are in the US$40 to US$50 per barrel range - making their expansions economically viable despite the oil price hike. For the record, the company has a market cap of 18.07 billion and a P/E ratio of 15.63. The company is currently paying at 4.46% on investment. I would thus rate the stock a buy.

This article first appeared on GuruFocus.

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