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Cenovus to cut production amid weak prices, rail bottleneck

Rows of steam generating plants at Cenovus Energy's Christina Lake oil sands operation on June 12, 2013.

RICHARD PERRY/NYT

Cenovus Energy Inc. is curtailing production and may accelerate maintenance at its oil sands plants to cope with weak prices as industry shipping constraints show few signs of easing.

The move is a drastic step for one of the country's biggest oil sands producers that reflects the industry's deepening struggles with tight export capacity, including delays shipping large volumes by rail.

Cenovus's Toronto-listed shares slumped nearly 5 per cent in midday trading on Thursday after the company revealed production at its flagship Christina Lake and Foster Creek oil sands plants had been running at lower rates since February.

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In a statement, the Calgary-based company said it was also studying ways to "optimize" maintenance scheduling at the facilities, a sign it may speed up periods of downtime when production is typically reduced to complete repairs.

Western Canadian select's discount to U.S. oil prices has averaged US$25 over the past three months, pressured by extended restrictions on major pipelines that have forced crude to pile up in storage.

Startup of a series of big-ticket oil sands expansions has only added to the strain, hitting companies all the way down the supply chain, particularly those that specialize in servicing heavy-oil operations.

"It's as bad as it's ever been," said Kelly O'Donnell, president of Wrangler Well Servicing Ltd., which has shut down four of its eight rigs in the Lloydminster region. "We have half our fleet parked with no work. It's not pretty."

Cenovus's move follows a similar decision by larger rival Suncor Energy Inc. to accelerate by one month maintenance at its Syncrude Canada Ltd. plant, trimming expected production. Canadian Natural Resources Ltd. has also delayed ramp-up of some heavy oil wells.

Cenovus has struggled to manage its new-found heft in the sector following its $17.7-billion megadeal last year for most of ConocoPhillips Co.'s oil sands and Canadian natural-gas assets.

The deal was panned by shareholders and led to the departure of key executives, including former chief executive Brian Ferguson. This month, the company's head of oil trading, Philippe Cote, resigned.

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Spokesman Brett Harris declined comment on the move for privacy reasons. In an e-mail, he said the decision to scale back output was driven by current market conditions.

He said that crude stored in reservoirs is "readily available to be recovered quickly when the conditions are right, which is why we haven't changed our guidance for full-year production."

The reductions reflect a 6-per-cent cut from January volumes of 378,000 barrels a day, although it kept its full-year output target for oil sands in the range of 364,000 to 382,000 barrels per day.

Cenovus said on Thursday that a shortage of locomotives has crimped use of a rail facility in Bruderheim, Alta. In the fourth quarter, the company said shipments averaged 12,000 barrels a day, a fraction of the terminal's 75,000-barrel capacity.

Last month, CEO Alex Pourbaix said the company was in talks with Canadian Pacific Railway Ltd. and Canadian National Railway Co. to boost shipments. It said on Thursday those discussions are continuing.

"We're taking steps to respond to a critical shortage of export pipeline capacity in Western Canada that is beyond our control and is having a negative impact on our industry and the broader Canadian economy," Mr. Pourbaix said in the release.

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Several analysts said the decision makes sense for Cenovus while warning heavy restrictions on pipelines and rail backlogs could spell a longer stretch of weaker prices than previously thought.

Toronto-Dominon Bank analyst Menno Hulshof told clients he now expects the price gap between Alberta's heavy crude and U.S. benchmark West Texas intermediate oil to average US$21.75 this year and US$19 next year, up from US$18 and US$17, respectively.

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