What's New

Cenovus Energy (TSX, NYSE: CVE) just posted one of its strongest quarters on record. Its CEO used the earnings call to deliver one of the starkest warnings the oil sands industry has heard in years.

Jon McKenzie told analysts on Wednesday that Canada's national conversation around oil sands development has become "myopically focused on the climate agenda" — and that theconsequences are already playing out in the investment numbers. The country, he argued, has spent over a decade making itself one of the least attractive places on earth to build new oil production.

The numbers back him up. Only one new greenfield oil sands project has been approved and built in Canada since 2013, even as global demand for oil has continued to grow. What growth Cenovus and its peers have managed has come through acquisitions and wringing more out of existing assets — not by breaking new ground.

"Greenfield development comes at a higher cost and a higher break-even than the growth that you've seen to date," McKenzie said. "We have to be pretty thoughtful about a set of policy environments that really do allow us to grow and fill a pipeline."

The policy environment he's referring to is, in part, Alberta's still-unresolved carbon pricing standoff with Ottawa. Prime Minister Mark Carney and Alberta Premier Danielle Smith signed a memorandum of understanding last November that committed to a new pipeline and an industrial carbon price of C$130 per metric ton. They set an April 1 deadline to finalize the deal. It blew past without resolution and talks are still ongoing.

McKenzie made his views on that tax clear. "The industrial carbon tax is unique to Canada," he said, adding that it gives companies a stronger incentive to invest abroad. Canada is one of the few oil-producing nations to levy such a charge on its energy industry — one reason, he said, that capital has been steadily migrating toward the U.S. and parts of the Middle East, where approval processes are shorter and operating costs are lower.

Record Quarter, Bigger Picture

The warning came alongside a strong set of numbers. Cenovus reported Q1 net earnings of C$1.57 billion, up 83% from the same period a year earlier, driven by higher oil prices, stronger refining margins and a full quarter of contribution from its MEG Energy acquisition. Upstream production hit a record 972,100 barrels of oil equivalent per day, up 19% year-over-year, while the company pulled in C$3.4 billion in adjusted funds flow.

Total revenues came in at C$12.4 billion. Downstream operations ran at 97% utilization. Cenovus returned C$1.0 billion to shareholders in the quarter through dividends, buybacks and preferred share redemptions, and raised its base quarterly dividend 10% to C$0.22 per share.

The results show what the industry can deliver when it has room to operate. McKenzie's point is that room is getting harder to find — and the recent production growth that fueled these earnings has largely been the product of deals and optimization rather than new capital investment in new projects.

A Standoff With High Stakes

The unresolved carbon pricing talks aren't the only thing creating headaches for the sector. Canadian Natural Resources earlier this year deferred its US$6 billion Jackpine carbon capture expansion at its Albian oil sands site, citing "lack of finalization of government regulatory policies" around carbon pricing and methane. The project is on hold until the rules are clear.

Carney, for his part, has not backed away from the industrial carbon price. He has described the global context for oil and gas as "very attractive," but has emphasized that Canada's ability to compete long-term hinges on getting its barrels to new export markets — not just the U.S., which still absorbs roughly 95% to 97% of Alberta's crude. That argument depends on the same new pipeline infrastructure McKenzie says requires a greenfield-friendly policy environment to actually fill.

The circular logic isn't lost on anyone paying attention. Canada needs new pipelines to grow its oil sector. Growing the sector enough to justify new pipelines requires new greenfield projects. And greenfield projects require the kind of cost and regulatory certainty that, right now, Canada isn't delivering. Cenovus shares closed Thursday down 1.7% at C$38.84. Earlier in the week, they had touched an all-time high of C$42.01.

By Charles Kennedy for Oilprice.com