Cenovus ramps up oil sands development

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Less than three months after striking out on its own, Cenovus Energy Inc. is taking an aggressive new stance on oil sands development, moving up its timeline for a major push by as much as a year.

With its new-found freedom to direct capital spending now that it is independent from EnCana Corp., Cenovus said it's also redoubling efforts to develop promising projects.

That brought a welcome response from investors, whose positive reaction to the first post-split earnings reports from both companies stands in stark contrast to the drubbing they have delivered Suncor Energy Inc. The energy giant's mega-merger with Petro-Canada met a much more hostile reaction after it posted disappointing earnings earlier this month and shares sank.

While the Suncor marriage with Petro-Canada is off to a rocky start, EnCana and Cenovus seem to be enjoying the single life. EnCana, for example, says its cost-trimming efforts have doubled an internal target. That, and some savvy bets on the price of natural gas, allowed it to beat earnings expectations in its first quarter as a pared-down company, and left it with enough money that it will look to acquisitions and 10 per cent growth in 2010 after years of flat production.

Suncor, meanwhile, has been fighting fires both real - it reported its third upgrader blaze in five months this week - and figurative, after executives told shareholders they were disappointed with the company's first quarterly results as a merged entity.

Suncor, for its part, said its investors continue to support the merger, although the company acknowledges that the market is impatient for better results ahead. Investors "know that it takes some time out of the gate to get things settled, especially considering how fast this deal was brought together," said spokesman Brad Bellows.

Cenovus does have its own issues. It has struggled with earnings at its refining operations and surprised markets with a higher-than-expected tax cost, resulting in earnings that lagged analysts' expectations. Analysts have also raised concerns that dividends from the split companies have not risen as some had hoped.

But investors are looking past those issues. Both EnCana and Cenovus have been sufficiently strong, both financially and operationally, that some are choosing to pull money from Suncor to invest in them.

"I scratch my head why would I want to own Suncor as a substantial position when I can get better operating metrics and higher growth out of these other companies that are paying me better dividends," said Rob Lauzon, the managing director of trading at Toronto's Middlefield Capital Corp. He has sold Suncor to buy not only EnCana and Cenovus, but also other single commodity-focused Alberta energy firms.

Why? Take Cenovus, for example. The company is confident enough in its ability to build oil sands projects that it plans to advance its construction schedule by six to 12 months, meaning it will hit a target of 428,000 barrels of production - more than three times its current 120,000 a day - ahead of its 2017 deadline. Its two main projects, Christina Lake and Foster Creek, are both joint ventures with Conoco. It thinks it can speed production without higher costs.

Cenovus is also doubling the number of exploratory wells it will drill on other oil sands lands this year, in a bid to figure out which of 10 other possible projects it will begin first, and is hiring 175 new people to help manage the growth.

While the company is profiting from expertise developed before the split, Cenovus chief executive officer Brian Ferguson also credits the ability he now has to concentrate on oil sands growth without being distracted by EnCana's bid to grow in new natural gas plays.

"It is a result of the heightened focus that we have," he said. "The more you focus, the better your results."

At EnCana, meanwhile, CEO Randy Eresman is considering whether to speed development plans, after his company more than doubled a 10 per cent cost cut target last year. He is also considering acquisitions, as EnCana seeks to build on its positions in promising U.S. and Canadian gas plays.

"We're in the process of evaluating our pace of development, considering our huge portfolio of low-cost opportunities. We have a strong balance sheet and are extremely well-positioned to capitalize on potential investment opportunities that arise."