Cenovus Energy Inc. (CVE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Cenovus Annual Meeting of Shareholders. [Operator Instructions] I would now like to hand the conference over to Patrick Daniel, Chairman of the Board. You may begin.

Thank you, Casey, and good afternoon, ladies and gentlemen. I'm Patrick Daniel, Chair of the Board of Cenovus Energy, and it's my pleasure to welcome you to Cenovus Virtual Annual Meeting of Shareholders. Due to the public health impact of COVID-19 and in alignment with the recommendations of Canadian Public Health officials to cancel large public gatherings, Cenovus is holding its shareholders' meeting in this new virtual format in order to help mitigate health and safety risks to our community, shareholders, employees and other stakeholders. Let me just spend a minute explaining how this will work. Your information screen displays instructions on how to participate in the meeting by voting and submitting questions. Vote and question functionality are available only for registered shareholders and proxyholders. All other guests are in listen-only mode. Later in the meeting when polling is open, voting will be displayed on your information screen. If you've already voted, you do not need to take any further action unless you would like to change your vote. If at any time during the meeting you experience technical difficulties, please refer to the technical support button on the broadcast section of your screen. Annual meetings, by their very design, are formal in nature, but the formal portion of the meeting will be followed by some brief remarks from our CEO and a 10- to 15-minute Q&A period where we will have a chance to answer your questions that have been submitted online. If you're a shareholder or a proxyholder, you can submit your questions at any time during the meeting by selecting the messaging icon on the information section of the screen and typing in your question. If your question relates to a voting matter, we'll answer your question when we reach that item during the meeting. All other questions will be answered at the end of the meeting after the CEO's remarks. Before we start the formal portion of the meeting, I'd like to say a few words about our Board renewal process. As we continue to renew the composition of our Board, I'm pleased that Keith Casey has agreed to stand for nomination at today's meeting. If elected, Keith will be a great addition to our Board of Directors, bringing strategic planning, refining and marketing and transportation experience as well as organizational management expertise. With this new nomination as well as 5 new directors over the past 3 years, Cenovus has made significant changes to the Board and demonstrated a robust approach to Board renewal. I'd also like to recognize Wayne Thomson for his time on the Board as he will not be standing for reelection. Wayne has brought his enthusiasm and innovative thinking to every board meeting, and on behalf of the Board, I'd like to thank him for his service. Both Wayne and I have been directors of Cenovus since the corporation's inception in 2009. I also will be retiring from the Board, and I'm not standing for reelection. Keith MacPhail has agreed to take on the duties of Chair of the Board on my retirement. I'll now call the formal meeting to order. In accordance with Cenovus bylaws, I'll Chair the meeting and Gary Molnar, our Corporate Secretary, will act as Secretary of the Meeting. I'd like to begin with the introductions of our Board of Director nominees. In addition to Alex Pourbaix, our President and Chief Executive Officer, who is present with us today, the following are the Board nominees who are attending the meeting virtually: Keith Casey, Sue Dabarno, Jane Kinney, Hal Kvisle, Steven Leer, George Lewis, Keith MacPhail, Rich Marcogliese, Claude Mongeau and Rhonda Zygocki. Our Cenovus leadership team is also available virtually on the call today. Moving forward with the meeting, I appoint Stephen Bandola and Erika Rowe from Computershare Investor Services to act as scrutineers of the meeting. The business of today's meeting is described in the notice of meeting and management information circular dated March 2, 2020, that was delivered and filed in advance of this meeting. A link to the management information circular and annual report are available on the Information section of the screen. The business of the meeting is to receive the audited financial statements for the year ended December 31, 2019, and to consider and vote on 3 items as set forth on Pages 5 and 6 of the circular. They are the appointment of our auditor, the election of directors and the nonbinding advisory vote on the corporation's approach to executive compensation. For efficiency, we prearranged for Alex Pourbaix and Gary Molnar, both Cenovus shareholders, to move and second the formal business motions. I've been advised by the Secretary that notice of this annual meeting was properly given and a quorum is present. Accordingly, I declare the meeting properly called and constituted for the transaction of business. We will now proceed with the formal business of the meeting. The first item of business is to receive the consolidated financial statements and the auditor's report for the year ended December 31. The 2019 annual report containing these audited financial statements was delivered to shareholders in advance of the meeting and the link can be found on the Information section of your screen and also on cenovus.com. We'll now move on to the voting items. The polls are now open for voting on all 3 items of business. You may vote at any time until the last item of business is completed, at which time I will declare the polls closed. Voting will be conducted by online polling and your voting options should be visible on your screen if you're a registered shareholder or a duly appointed proxyholder. If you have already voted, you do not need to take any further action unless you would like to change your vote. Item 1 on the agenda is the appointment of our auditor as set forth on Page 5 of the Management Information Circular for the meeting. Could I have a motion, please?

I move for a vote on Item 1 to appoint our auditor as set forth on Page 5 of the Management Information Circular for this meeting.

Thank you, Mr. Pourbaix. Is there a seconder for the motion?

Mr. Chair, I second the motion.

Thank you, Mr. Molnar. Are there any questions on this motion?

There are no questions on the motion.

Thank you. We will now move to Item 2 on the agenda, the election of the director nominees as introduced earlier and as set forth on Pages 5 and 6 of the Management Information Circular for this meeting. Could I have a motion, please?

I nominate the individuals introduced earlier and as set forth on Pages 5 and 6 of the Management Information Circular.

Thank you, Mr. Pourbaix. Is there a seconder for the motion?

Mr. Chair, I second the motion.

Thank you, Mr. Molnar. Are there any questions on this motion?

There are no questions on the motion.

Thank you. We'll now move on to Item 3, which is the nonbinding advisory resolution to approve the corporation's approach to executive compensation. Could I have a motion, please?

I move for a vote on Item 3, a nonbinding advisory resolution to approve the corporation's approach to executive compensation as set forth on Page 6 of the management information circular for this meeting.

Thank you, Mr. Pourbaix. And is there a seconder for this motion?

Mr. Chair, I second the motion.

Thank you, Mr. Molnar. Are there any questions on this motion?

There are no questions on this motion.

Okay. We will now pause for a moment to allow those voting online to do so. So we will -- the line will go silent for 30 to 60 seconds while we allow those online to vote. [Voting]

Okay. Online polling is now closed. In order for today's resolutions to be passed, the approval by a simple majority of the votes cast by shareholders must be received. I've received the scrutineer's report and confirm as follows: Pricewaterhousecoopers LLP are appointed as auditors of Cenovus. Each director nominee is elected to the Board by more than 98% of the votes cast by shareholders. The nonbinding advisory vote to accept the approach to executive compensation passed by more than 96% of the votes cast by shareholders. I direct the Secretary to file the final scrutineer's report with the minutes of the meeting. Details of the voting results will be filed with securities regulators and included in our news release following the meeting. This now concludes today's formal business. We'll conclude the meeting and turn to the CEO remarks and Q&A portion of the meeting, but could I have a motion to terminate the meeting, please?

I move that this meeting conclude.

Thank you, Alex. I declare the formal business of the meeting concluded. And Alex, now over to you for your remarks.

Thanks, Pat. Hello, everybody, and thanks for joining us today for this webcast version of our annual meeting of shareholders. I appreciate that these past few weeks have been challenging for everyone and I hope you and your family and friends are all staying safe and healthy. Before I proceed, please note the advisory on the screen. It refers to what I am about to discuss. Additional information about our forward-looking statements and financial measures can be found in our first quarter news release, first quarter MD&A and our annual report. When we met last year, few, if any of us, could have imagined that today, we would be in the middle of a global pandemic that not only threatens the health of Canadians but has also temporarily, but significantly, reduced global demand for oil and refined products and sharply impacted benchmark commodity prices. Today, as a result, Canadian energy shares, including Cenovus' are trading well below the underlying value of their assets and long-term cash-generating potential. This slide illustrates a sharp contrast between 2019 when Cenovus outperformed the S&P/TSX Energy Index in the first quarter of 2020 when valuations for the entire sector fell rapidly in response to the decline in oil prices. Inevitably, the COVID-19 pandemic will pass and markets will recover, and I fully believe share prices in our sector will follow soon, but no one knows how long that is going to take. In the meantime, while we cannot do anything about the macroeconomic environment, we can take steps to protect our balance sheet and enhance our financial resilience, and that's exactly what Cenovus has done and will continue to do. Right now, our number one priority is protecting the health of our staff. After that, our focus remains on preserving our balance sheet, maintaining liquidity and continuing to manage our business to drive our cash flow breakevens as low as we can. Over the last 2 years, we've made significant progress in reducing debt, maintaining capital discipline and transforming Cenovus into one of the lowest-cost producers in our industry. The results of all our hard work were evident in our excellent financial and operating performance in 2019, which I'll talk more about in a minute. With the spread of COVID-19 and a supply dispute between Saudi Arabia and Russia that led both countries to increase production, the macroeconomic environment declined rapidly during the first quarter. Fortunately, Cenovus began 2020 in a strong financial position with multiple options to prudently manage our business and our balance sheet. On March 9 and again, on April 2, we took decisive action to adjust our business plan for the year to help us navigate the current environment. We cut planned capital spending by $600 million and reduced forecast operating cost by about $100 million. In addition, we trimmed our planned general and administrative cost for the year by about $50 million. That includes company-wide pay reductions with an emphasis on Board, executive and senior leader compensation. We deferred final investment decisions on growth projects and announced plans to temporarily suspend our crude-by-rail program. And as you're aware, we suspended our dividend, which we've always said would be sustainable at a West Texas Intermediate price of USD 45 per barrel or more. With our crude-by-rail program now largely wound down, we have no immediate plans to make use of Alberta's special production allowance program, which lets producers exceed mandatory curtailment levels if they ship incremental production volumes by rail. As a result, we've reduced our production forecast for the year and are actively managing production levels as market conditions change to optimize the value we receive for our products. These measures taken to protect our balance sheet and strengthen our business have been well received by our major investors. We continue to look for additional opportunities to further reduce our costs and spending. I also want to reassure you that Cenovus is in a strong liquidity position. At the end of the first quarter, we had a $4.5 billion committed credit facility with no maturities until 2022. And in this challenging environment, we have since secured another $1.1 billion committed credit facility from several of our Canadian lenders, which is the testament to the confidence they have in our company. We also have $1.6 billion of uncommitted demand lines and no bond maturities until 2022. We're confident that we have ample liquidity and runway to maintain safe and reliable operations through a prolonged period of low oil prices. Let me turn briefly to our 2019 results. Thanks to the progress we've made in strengthening our balance sheet, reducing our costs and maintaining capital discipline over the last couple of years, we delivered excellent financial and operating performance in 2019. We generated more than $2.5 billion in free funds flow even with government-mandated production curtailment. By year-end, we had reduced our net debt to $6.5 billion, down from $8.4 billion a year earlier. We exceeded our crude-by-rail shipping goals, and we further reduced upstream operating costs, lower capital spending from 2018 and efficiently managed production at our facilities under mandatory curtailment. We also set bold sustainability targets in 4 key environment, social and governance areas: climate and GHG emissions, indigenous business spending, land and wildlife and water stewardship. Lastly, but most importantly, our overall health and safety performance improved from the previous year, and we achieved the second lowest recordable injury frequency in our history. And in the first quarter of this year, we continued our strong safety performance with no significant incidents. While the market conditions we're facing today are very different than they were last year, they won't be with us forever. Ultimately, I believe our 2019 performance reflects the underlying strength of our assets, our financial position and our long-term cash-generating potential. And in the short term, I believe, we are well positioned to remain financially resilient through this current downturn. I'd like to take a moment now to talk about the steps we've taken to protect the health and safety of our staff and the continuity of our business during the COVID-19 pandemic. Following the guidance of public health officials, we've directed all staff who are able to do so to work from home. This includes virtually all of our office staff as well as some of our field staff who don't need to be at site for our operations to continue running safely and smoothly. As you can see on your screen, people have been sending us photos of their home offices, and we've been able to work very efficiently from home because of some significant IT work we've done over the past couple of years as part of our modern workplace program. At our sites, we've implemented social distancing measures, stepped up cleaning and sanitation and begun active health screening for people who are traveling to site. And we've established mandatory self-isolation protocols and restricted travel policies. Let's all hope we see some relief from the COVID-19 pandemic soon. But in the meantime, rest assured that we are doing everything we can to reduce the risk to our staff and everyone who works at our sites. In closing, I'd like to reiterate that Cenovus is well positioned to navigate the current market challenges as well as those related to COVID-19. We worked hard over the last 2 years to reduce debt and enhance our financial resilience. We've taken decisive steps to further protect our balance sheet in response to rapid decline in oil prices in the first quarter. And while the timing for reaching our long-term net debt target will depend on the duration of the current business environment, we remain committed to getting our net debt to $5 billion or below as soon as it is reasonably possible and to continuing to focus on creating long-term value for our shareholders. Just before I wrap up, I would like to acknowledge the significant contributions of our Board Chair, Pat Daniel, who did not stand for reelection to the Board today. Pat has been a Director since Cenovus' inception in 2009 and has acted as Board Chair over the last 3 years. I've known Pat for almost the entirety of my business career and I can truly say that working beside Pat has really been an honor for me and the rest of our leadership team, and we very much wish him all the best in the future. Thank you. And now we will address questions that have been submitted online.

Thank you, Mr. Pourbaix. It's Brett Harris, Manager of Communications. We have no questions from our shareholders or proxy -- registered proxyholders at this time. We will wait for 30 seconds to see if anybody has a question to pose. And if not, we will wrap up the meeting.

Thanks, Brett.

Mr. Pourbaix, we have no questions at this time.

Okay. Thank you, Brett. Ladies and gentlemen, on behalf of your Board of Directors and the leadership team, thank you for attending our annual meeting of shareholders.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.