Cenovus, Husky take oil price drop in stride, stress flexibility is key

CALGARY – Executives with two big Canadian oil companies are taking recent oil price weakness in stride, signalling no immediate plans to throttle back spending, but ensuring they have the flexibility to do so if needed.

Cenovus Energy Inc. (TSX:CVE) and Husky Energy Inc. (TSX:HSE) are both in the midst of finalizing their capital budgets in 2015, with details set to be unveiled in December.

Cenovus CEO Brian Ferguson gave a glimpse Thursday of what next year’s budget will look like — roughly the same “magnitude” of 2014’s capital expenditures of around $3 billion, with a focus on projects that can deliver near-term cash flow.

In an interview, Ferguson said next year’s plans have not been swayed by oil’s drop from $95 in mid September to around the US$80-a-barrel mark recently.

Cenovus became an independent company just under five years ago when it was spun off from Encana Corp. (TSX:ECA). In the beginning, more of a focus was on building up its portfolio, but this year the split between short- and long-term projects was about 50-50.

“We’ve evolved and matured in terms of our own production base,” said Ferguson. “It’s part of our evolution.”

On an earlier conference call, he said about $2 billion in spending that’s been earmarked for the company’s flagship Foster Creek and Christina Lake oilsands projects will be proceeding as planned. But there’s more discretion when it comes to growth projects.

“You should expect us to be very prudent in terms of any decisions with regard to that growth capital, beyond $2 billion, as to how much we will actually choose to invest in 2015 or in subsequent years.”

Husky CEO Asim Ghosh divulged no details on his company’s 2015 plans, but said times like these call for “prudence and focus.”

Ghosh said he’s concentrating on what’s within Husky’s control: making sure projects operate smoothly.

“My overall philosophy is we cut our coat to the cloth available,” he told a conference call. “I’ve got enough levers to play with to give me that flexibility.”

He said Husky has a “wide” portfolio in which spending can be easily shifted around.

Earlier Thursday, Cenovus released third-quarter results that beat analyst estimates. Its stock soared $1.70 or almost 6.5 per cent to close at $27.97 on the Toronto Stock Exchange.

Operating earnings were $372 million, or 49 cents per share, up from $313 million, or 41 cents per share a year earlier. Analysts surveyed by Thomson Reuters were on average calling for operating earnings of 41 cents per share.

Net income, which accounts for one-time items, was $354 million, four per cent lower than at the same time a year earlier.

Cash flow per share on a diluted basis was $1.30, up from $1.23 last year and 15 cents ahead of analyst estimates.

“Cenovus showed an operationally very strong quarter, with a material cash flow beat,” wrote Desjardins analyst Justin Bouchard in a note to clients. “The key projects are all moving forward, paving the way for meaningful growth over the next decade.”

Meanwhile, Husky earned $571 million in its third quarter, up from $512 million in the same period a year ago.

CIBC World Markets analyst Arthur Grayfer said operating earnings per share of 49 cents came in 26 per cent below CIBC’s estimate of 67 cents, mainly due to lower volumes at the Liwan natural gas field in the South China Sea and overall liquids volumes, higher operating costs, interest and cash taxes and higher stock-based compensation. Analysts polled by Thomson Reuters had been on average expecting operating earnings of 59 cents per share.

“It’s been a good quarter, but not without its challenges,” said Ghosh.

Husky said Thursday that the cost of developing the first phase of its Sunrise oilsands project in northern Alberta has risen to $3.2 billion, up from its previous estimate of $2.7 billion.

While the price of building the project is going up, Husky says it can reduce the cost of running it — two thirds of the project’s total price tag — through technology. For instance, Husky is aiming to boost efficiency through vacuum-insulating tubing, which prevents heat loss, and by using rigs that can more easily move from place to place.

Shares in Husky closed 11 cents lower are $27.79 Thursday on the TSX.

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