Cenovus Energy makes $700-million cut to 2015 spending budget

Cenovus Energy Inc. has lowered its 2015 capital budget to between $1.8 billion and $2 billion, which is about $700 million less than the previous estimate and more than 15 per cent below last year's spending levels.

It's also looking for ways to reduce annual operating and cost reductions by between $400 million and $500 million in the years ahead and expects to redeploy and reduce its workforce in the coming weeks.

The Calgary-based oil producer and refiner says it's taking the move to preserve cash in response to further erosion in global oil prices, which have fallen below US$50 a barrel from more than $100 a barrel last summer.

The company says it plans to reassign employees to core areas in coming weeks and begin reducing the size of its contract workforce, but didn't provide details on how many people will be affected.

Cenovus says it's suspending most of its conventional drilling program in southern Alberta and Saskatchewan but will continue projects at the Christina Lake and Foster Creek oilsands operations in northern Alberta.

Cenovus chief executive Brian Ferguson says he believes crude oil prices will rebound, but the timing is uncertain.

"As a result of the dramatic slowdown across the energy sector, we expect to see continued reductions in demand for labour, service and materials.

This should create potential opportunities for us to drive improvements in our cost structure," Ferguson said in a statement.

Betting on heavy oil

Cenovus has also made an interesting structural change, backing away from conventional pipe projects in Saskatchewan and Alberta so it can concentrate on oilsands development.

It’s a bet that it can make more money, even with oil at $45 US a barrel, on heavy oil, says Tricia Leadbeater, director of wealth management at Richardson GMP.

“Heavy oil going forward has more of a market because the U.S. is producing so much light oil,” she said.

Leadbeater predicts more Canadian firms will be reviewing their 2015 capital budgets in light of the continued slide in oil prices.

In September companies began to think about freezing capital spending, in November and December they revised investment plans downwards and now they are looking at cuts to contract employees.

“The next stage, which they are hesitant to take, is to let go of long term staff. Those people have skills that are hard to find,” she said.

It’s too early to tell if companies will have to take that step, she said.