Cenovus Energy's push to Asia pays off

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The quest for alternative markets, including Asia, is already paying off for energy companies that have found ways around a supply glut that has forced the oil patch to sell its product on the cheap.

The dramatic discounting of Canadian crudes in the first quarter has stirred market concern about the impact on companies fetching poor prices for their oil.

But on Tuesday, Cenovus Energy Inc. reported earnings that showed a substantial rise in the average price it achieved for its oil, up to $72.54 from $62.63 in the same period last year – a 16-per-cent gain.

That outstripped the 9.5-per-cent, year-over-year increase in North America's benchmark West Texas intermediate price, and was even more striking given the 1-per-cent fall in the first-quarter value of the Alberta heavy oil that dominates Cenovus production.

The company attributed the gain to a series of factors, including a rise in its production of light oil, which attracts a pricing premium of $15 to $30 a barrel over heavy blends. Perhaps more important, Cenovus has now secured guaranteed delivery on the Trans Mountain pipeline that connects Alberta with a ship-loading terminal in B.C.'s Lower Mainland.

The company is now sending west 11,500 barrels a day – more, when there is space – that can be sold at international oil prices. That's only 7 per cent of Cenovus's total oil output, but the pricing gains are substantial. International Brent crude has sold for $15 to $20 a barrel more than WTI, and sales to California refiners have not been affected by the supply glut that has created downward pressure on Canadian crude selling in the U.S. Midwest.

Cenovus made its first oil shipment to Asia in February, amid a broader industry push to open new Pacific markets.

In addition, the company has begun sending some of its product by rail, which allows it to sell to other markets with stronger pricing. Those volumes have been slim, only 2,000 barrels a day, but the company aims to increase that to 5,000 a day by year's end.

Hedging, the practice of selling barrels far into the future, also played a role in the pricing gain.

At the same time, Cenovus has benefitted from a top-to-bottom approach that allows it to use refining profits to balance oil-price movements. When heavy oil prices are low, it can buy cheaper feedstock for refineries, which are then able to boost profits by making gasoline and diesel that sell at stronger pricing. That "integrated" strategy saw refining cash flow rise 48 per cent in the quarter, to $266-million, compared with the same period last year.

Cenovus saw first-quarter cash flow rise 30 per cent to $904-million, or $1.19 a share. Its oil production was up 14 per cent, while natural gas declined 2 per cent.

The company remains far from sealing a deal on its Telephone Lake assets in northeastern Alberta, which sources have said could net somewhere between $1-billion and $3-billion in a joint venture or partnership. Cenovus initially said it expected to announce a deal late last year, but chief executive officer Brian Ferguson now says "finding the right strategic arrangement for Cenovus is our top priority, and is proving a bit challenging in the current environment."

Pressed for details on Wednesday, he pointed to the pricing problems for Alberta oil. "There are factors at work that are discounting Canadian crudes, which everyone is seeing in the headlines," he said.