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Hedging loss knocks Cenovus Energy earnings for a loop as oil prices recover

Bad bets on heavy crude prices caused Canadian oil sands producer Cenovus Energy Inc. to swing to a loss in the second quarter even as spot prices and production improved.

After adjusting for the C$697 million hedging loss, the company had a strong quarter as output increased and production costs dropped to C$7.32 per barrel, their lowest ever, CEO Alex Pourbaix said on a July 26 conference call.

The Calgary, Alberta-based company sold a large portion of its production to backstop debt it took on when it bought out its oil sands partner ConocoPhillips for C$16.8 billion in 2017. The hedges were reduced to about 37% of the company's liquids production by the end of the quarter. "I'm confident that Cenovus has turned a corner and is well positioned for the remainder of 2018 and into 2019," Pourbaix said.

Cenovus saw production of tar-like bitumen at its Christina Lake and Foster Creek oil sands operations surge to a record 390,000 barrels per day in the quarter, Pourbaix said. The company was able to ramp up production it had slowed during the first quarter because of low realized prices caused by a pipeline outage. The company produces oil using steam-assisted gravity drainage, a method where well pairs are drilled and steam is injected into one to help bitumen flow out of the other. Pourbaix said that with the company's cash outlook improving with the expiration of its hedges, it will focus on reducing its overall debt.

"With our corporate hedge positions now significantly reduced, we expect to generate significant free funds flow in the second half of the year and into 2019," Pourbaix said on the second-quarter earnings call. "I want to reassure all of you that our first priority for these funds and the proceeds from any asset sales is to continue to deleverage."

Cenovus plans to sell more of its Deep Basin assets, approximately 3 million acres of natural gas-producing lands and facilities along the eastern slope of Canada's Rocky Mountains. "When you think about what could a streamlined Deep Basin position look like ... we could potentially, if we see value, divest up to somewhere toward 50% of the portfolio over a longer time period," Pourbaix said.

On July 26, Cenovus reported a second-quarter net loss from continuing operations of C$410 million, or 33 Canadian cents per share, compared with net income of C$2.56 billion, or C$2.30 per share, in the year-earlier quarter. When adjusted for the hedging loss and asset sales in the second quarter of 2017, the company reported second-quarter funds flow of C$774 million, or 63 cents per share, compared with C$745 million, or 67 cents per share, a year earlier.