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Cenovus weighing royalty spinout, adding rail expertise to leadership team

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CALGARY - The CEO of Cenovus Energy Inc. says he's carefully considering whether to spin out 4.5 million acres of royalty land into a new entity, or if shareholders would be better off with the status quo.

Cenovus chief executive Brian Ferguson said Wednesday he's been asked numerous times by existing and prospective shareholders whether the Calgary-based company would consider a spinoff transaction similar to the creation of PrairieSky Royalty Ltd. (TSX:PSK) earlier this year by Encana Corp.'s (TSX:ECA)..

"I want to make sure that anything that Cenovus considers and contemplates is something that has got sustainable value for Cenovus shareholders," Ferguson said in an interview following the release of Cenovus' second-quarter results.

"I don't want to do something that in one or two years, for whatever reason, we may regret. So I'm being very thoughtful about this."

A spinout could be a good way to "crystallize" value from land that traces its roots back to Canadian Pacific's erstwhile energy business, providing a high-quality, low cost stream of cash flow. But as things stand today, investors are benefiting from the properties, which have helped Cenovus sustain its dividend and internally fund oilsands growth.

The spinout of PrairieSky in May raised $1.67 billion for Encana and marked one of the biggest initial public offerings in Canadian history. Encana retains a 54 per cent stake in that outfit, which enjoys minimal overhead costs and makes money by allowing other energy firms to develop oil and gas on its 5.2 million acres in southern and central Alberta.

Cenovus was itself spun off as a separate company from Encana in 2009. The royalty lands were divided between the two companies along geographic lines, with Cenovus getting the lands in eastern Alberta and Saskatchewan.

Also Wednesday, Cenovus announced it had created a new leadership position within the company dedicated to crude-by-rail, signalling it expects that transportation mode is here to stay. Kent Avery will be filling that role.

As part of a broader effort to get more value out of the oil and gas it produces, Cenovus has also appointed Bob Pease as executive vice-president of markets, products and transportation.

Most oil producers say they'd prefer to ship their oil to market by pipeline, as it's more efficient. But with environmental opposition clouding the outlook for pipelines, firms have been increasingly turning to rail as an alternative — a controversial proposition, especially after last year's deadly crash by a runaway oil train in Lac Megantic, Que.

But Ferguson sees rail as more than a stop-gap measure, because it offers more flexibility to producers. Specialized railcars can carry bitumen that has been diluted to varying degrees, unlike pipelines, where a lot of dilution is needed for the crude to flow. As well, rail enables crude to be shipped to markets that aren't served by pipelines.

"I can see us moving a very meaningful of our component total production by rail for a long time," said Ferguson.

The company completed eight unit train deliveries during the first half of the year. Unit trains consist of 100 or so rail cars carrying a single product. Cenovus says it's on track to reach 30,000 barrels of rail loading capacity by the end of this year. Ferguson said it's likely to move more than that next year, although Cenovus has not yet worked through its 2015 budget.

Earlier Wednesday, Cenovus posted stronger results for the second quarter.

The company brought in $615 million in net earnings during period, or 81 cents per share. That's up from $179 million, or 24 cents per share diluted, in the same quarter last year.

Operating earnings, which strip out the effects of one-time items, were $473 million, or 62 cents per share — up 85 per cent from a year earlier and handily beating the average analyst estimate of 49 cents per share, according to Thomson Reuters.

Cash flow was almost $1.2 billion versus $871 million year-over-year, up 37 per cent, as Cenovus said it benefited from increased oil production and higher commodity prices.

Cenovus is known for its steam-driven oilsands operations in northeastern Alberta.

The company's oil sands production averaged almost 125,000 barrels per day net in the second quarter, up 33 per cent from a year earlier, primarily driven by its Christina Lake project in northern Alberta.

At its Foster Creek oilsands project, the company has been working to circulate steam more effectively through the maturing reservoir. Ferguson said he's happy with how the project has been performing so far this year.

Follow @LaurenKrugel on Twitter

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