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

Good morning, everyone. Thank you for standing by, and welcome to Cenovus Energy's conference call regarding the acquisition of Athabasca Oil Corporation. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the meeting over to Mr. Patrick Read, Vice President, Investor Relations and Internal Audit. Please go ahead, Mr. Read.

Thank you, operator. Good morning, everyone, and thank you for joining us to discuss Cenovus' proposed acquisition of Athabasca Oil Corporation announced earlier today. On the call today are Cenovus' CEO, Jon McKenzie; and CFO, Kam Sandhar. In a moment, I will turn the call over to Jon and Kam to discuss the transaction. We will then open the line for questions. Along with the news release issued this morning, we've posted a presentation with additional details in the Investor Relations section of our website. Before we begin, I will 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. Unless otherwise indicated, all figures discussed today are in Canadian dollars. And for the question-and-answer portion of the call, please keep the one question with a maximum of one follow-up. I will now turn the call over to Jon. Jon, please go ahead.

Great. Thank you, Patrick, and good morning, everybody. Today, Cenovus announced that we have entered into a definitive agreement to acquire Athabasca Oil Corporation in a cash and stock transaction valued at about $5.7 billion or about $12 per share. This transaction builds on a strategy that has been at the core of Synovus for decades. We have spent more than 20 years developing, operating and growing SAGD assets at scale. Throughout that time, our operating model has continued to evolve as we have advanced technology, refined our development practices and incorporated new learnings from across our portfolio. The result is an approach that consistently delivers industry-leading performance that has become one of Synovus' clearest competitive strengths. That competitive advantage is what underpins our confidence in and excitement for this transaction. The rationale for this transaction for Cenovus is clear and obvious. Athabasca brings a high-quality oil sands resource base with decades of development potential ahead of it. It adds approximately 1.3 billion barrels of 2P reserves and approximately 2.3 billion barrels of 2P plus contingent resource. That implies best-in-class reserve life index of approximately 75 years and a resource life of approximately 140 years. These are long-life assets located in an area where Cenovus already has a deep operating experience and strong understanding of the resource. They also represent one of the only remaining large-scale opportunities to add meaningful thermal reserves, resource and future development inventory within the core of the oil sands. That combination of quality, scale and long-term growth is particularly compelling. Our confidence in this transaction is grounded in a track record that has been built over many years. We have consistently demonstrated our ability to improve performance and unlock additional value through the application of Cenovus' operating model and through a proven track record of profitably delivering over 30 phased expansions. We have done that across the assets we have acquired and we have done that across the assets that have been part of Cenovus since the beginning. From Foster Creek and Christina Lake to Sunrise, Lloydminster and most recently, Christina Lake North, we have continued to improve the operating performance, enhanced capital efficiency and to grow production through disciplined execution. We have also demonstrated the ability to advance major growth projects successfully integrate acquired businesses and deliver on the commitments we make. Now let me spend a few minutes on how we think about creating value from these assets. Athabasca's thermal assets produce about 40,000 barrels a day. Through a combination of existing asset optimization, the Leismer expansion and future development to corner, we see an opportunity to increase thermal production to approximately 115,000 barrels a day by 2032. That represents one of the most significant organic growth opportunities available in Canadian Oil Sands today. In the near term, we see opportunities to increase production through an expanded redevelopment well program and targeted optimization initiatives at Leismer and Hangingstone. We also see an opportunity to increase production from Leismer to more than 60,000 barrels a day through debottleneck and facility expansion. By executing on this plan, we can reduce the steam oil ratio by about 20% and deliver brownfield growth and an attractive capital efficiency of $35,000 per flowing barrel. Beyond Leismer corner represents a significant future growth opportunity that Athabasca has spent years advancing and derisking. This is where we have the ability to accelerate and execute that development plan. We bring leading SAGD operating expertise, a proven project execution capability and the experience required to advance multiple opportunities at the same time. We also have a strong balance sheet that supports our ability to fund these opportunities through all points in the cycle. By bringing forward and consolidating multiple phases of expansion, our development plan contemplates advancing corner to approximately 40,000 barrels a day by 2032, 3 years earlier than the current development plan. When combined with the existing asset optimization opportunities, these projects support thermal production of approximately 115,000 barrels a day by 2032. By looking at the combined set of opportunities in the thermal business, our fully accelerated development plan would involve approximately $700 million to $800 million of annual capital investment through 2030. That includes about $200 million per year of sustaining capital plus the growth capital that would be required to advance the expansion at Leismer and advancing and accelerating the Corner project. Another unique aspect of these assets is approximately some of the existing undeveloped resource we have in our portfolio, including Thornbury and May River, which together hold an estimated 550 million barrels of recoverable resource. Now when we develop Narrows Lake, we proved out our ability to move steam over long distances to more efficiently capture nearby resource. This transaction creates the possibility in time to access those resources without building a new greenfield processing facility opening the door for additional capital-efficient growth options in our portfolio. We are encouraged by the pace at which the governments have recently moved to support major resource development in Canada both the federal and provincial governments have made positive changes and are working to finalize arrangements to making investing in Canada and the energy business competitive again. Recent announcements around tax policy, royalties, new pipelines and regulatory efficiency are important steps in the right direction. These steps will have a meaningful impact on our ability to advance growth projects like the ones we are contemplating at Leismer and Corner. We remain committed to working constructively with governments to reach definitive arrangements later this year, which support production growth by implementing competitive regulatory and policy reforms. While the thermal assets are the primary driver of this transaction, Athabasca also brings the opportunity to consolidate ownership of the Duvernay Energy Corp., strengthening our position in a high-quality oil-weighted resource play. Duvernay Energy Corp. has assembled an attractive inventory within the Kaybob fairway and full ownership gives us more control over the pace of development going forward. The Duvernay asset is currently self-funding and producing about 5,000 barrels a day with the potential to grow and sustain 20,000 BOE per day with additional investment. Together, this transaction adds high-quality reserves, significant growth potential and a development runway that extends for decades. We've also identified about $85 million of annual corporate and commercial synergies, which we expect to capture promptly following the close of the transaction. These are expected to come from reduced G&A and financing costs along with optimization of transportation and marketing arrangements. We believe that Athabasca is a natural fit with our strategy and a strong addition to the Cenovus portfolio. I'll now turn it over to Kam to walk through the financial aspects of the transaction.

Thanks, Jon, and good morning, everyone. Before I walk through the details of the transaction, I want to briefly touch on our current financial position. Synovus' business performance remained stable and consistent through the third quarter with production and throughput continuing to perform well through to the end of September. This strong operational performance and favorable commodity price environment put the company in a position where net debt at September -- at the end of September ended at approximately $3 billion. We continue to not only strengthen our balance sheet but also returned $1.9 billion to shareholders through dividends and share repurchases through the third quarter. Our continued operational performance, coupled with strong commodity prices has resulted in significant debt reduction complemented with returning cash to shareholders while positioning us well to move forward with this transaction. Turning to the transaction itself. We have structured the acquisition to balance 3 important priorities; first, maintaining a strong balance sheet and investment-grade credit ratings; second, minimizing dilution to our existing shareholders; and third, preserving flexibility to continue to return cash to shareholders and fund attractive growth opportunities across the combined portfolio. The transaction is valued at approximately $5.7 billion the consideration will be composed of up to maximum 75% in cash or a maximum of 35% in Cenovus shares with the final split determined by shareholder elections. Assuming the 75% cash consideration, this equates to approximately $4.3 billion of cash and the issuance of 32 million shares. The cash portion of the transaction will be funded through cash on hand and existing Cenovus credit facilities. Following completion of the transaction at current strip pricing, we would expect net debt to fall between $5 billion and $5.5 billion by the end of 2026. That equates to well under 0.5x net debt to adjusted funds for at strip pricing. There is no change to our commitment to maintain strong liquidity in our mid-BBB investment-grade credit ratings. And with share buybacks totaling 34 million shares during the third quarter, we've already offset the shares we expect to be issued through the transaction. We believe this structure appropriately utilize the strength of our balance sheet while limiting dilution to existing shareholders. The transaction is expected to be accretive to adjusted funds flow per share in 2027, including the impact of synergies. Importantly, this acquisition does not change our approach to capital allocation. We remain committed to maintaining a strong balance sheet, investing in higher return opportunities and returning excess cash to shareholders. I'll now turn the call back to Jon for some closing remarks.

Great. Thank you, Kam. When I step back and look at this transaction, what stands out is the quality and the duration of the opportunity. Athabasca brings approximately 1.3 billion barrels of 2P reserves and a thermal asset base with a reserve life in excess of 75 years. I'm confident that we can put our people and operating model to work across this asset base, accelerate development and maximize its potential over the coming years. It adds meaningful opportunity to our long-term growth plans and expands the opportunity set available to Cenovus and our shareholders. Combined with our existing assets, it further strengthens our position as Canada's leading SAGD producer. We believe it's a natural fit with our strategy and a strong addition to the Cenovus portfolio. And with that, we'll be happy to answer your questions.

[Operator Instructions] The first question comes from Neil Mehta with Goldman Sachs.

Congratulations on the transaction. I guess, John, how much of this was about getting access to existing production in PDP versus the growth initiatives here. And to the extent part of what you're paying for is the growth optionality, can you spend a little time unpacking both the opportunity at Leismer in that quarter?

Sure. And you're right. I think one of the things that I would note, not only is this a really high-quality set of assets with resource depth, but one of the things we like about both Leismer and Corner is just the quality of the asset in there. We talked about Rich pay in this company, and this is a set of assets that have deep quality resource potential going forward. So it's not just about the magnitude of the resource. Quality is a key differentiator. And one of the things that we find in this basin, Neil, is you sometimes end up with these scenarios where companies own significant resource and they've undercapitalized it over the years for a variety of reasons. And then we have the ability to come in and accelerate that growth. And when we apply our operating model, we can take advantage of some efficiencies as well. So when we look at Leismer right now, there is a debottleneck that is largely paid for and in place that will take that asset to 40,000 barrels a day, and we expect to get there. And early to mid 2027. And then beyond that, we have an opportunity to take that to 60,000 barrels a day through brownfield debottlenecking of the existing plant as well as accelerating some future well pads. And one of the things that excites us about Leismer. As we go forward, we kind of see the SOR in those well pads being somewhere around the 2.5% range, which is kind of best in class. So that is a tremendous resource. We've identified 60,000 barrels of potential production over a reasonably short period of time. And again, that resource is something of the highest quality. Corner is probably, we think, one of the most prolific undeveloped resources in the basin. We've identified a project to take it to 40,000 barrels a day, but on an accelerated time frame. And what excites us about that, again, is it's going to have a low SOR and lots of room for us to optimize as we go forward. So really, in our minds, this is about taking a piece of real estate that is strategic. It is of the highest quality, and it gives us the ability to accelerate future growth as well as apply sort of optimization based on our operating model. We've already kind of defined about 80 redevelopment opportunities, both at Hangingstone and at Leismer. So we're very confident that in the short term, you're going to see a production bump and then over the next 5 years or so, you're going to see a realization to the numbers that I talked about.

Yes. And then just a follow-up. This might be for Kam, but you guys have the secured percentage of your excess free funds flow to shareholder returns. If I remember, between $4 billion and $6 billion, your 75% back to shareholders and below $4 billion, you're 100%. So this will get you to around $5 billion, $5.5 billion by year-end. So is it fair to say through this process and into next -- early next year, we should be thinking 75% still to shareholders and the other 25% of debt reduction.