July 25, 2012 / 11:00 AM / in 6 years

UPDATE 2-Cenovus hangs up search for Telephone Lake oil partner

* To develop 90,000 bpd bitumen project on its own
    * Would-be partners did not bring strategic advantages
    * Second quarter earnings lag estimates
    * Shares down 2.7 percent

    By Jeffrey Jones
    CALGARY, Alberta, July 25 (Reuters) - Cenovus Energy Inc
 has called off its search for a partner to help develop
the Telephone Lake oil sands project in Alberta, saying none of
the would-be co-venturers had the right combination of assets
and patience for a long-term development.
    Cenovus, which reported a steeper-than-expected 40 percent
drop in second-quarter profit on Wednesday, has decided after a
nearly nine-month search to push forward with the 90,000 barrel
a day steam-driven project on its own.
    The 1.3 billion barrel Telephone Lake lease has the
potential to become one of its main money-generators, it said.
    Calgary-based Cenovus is best known for its Foster Creek and
Christina Lake oil sands developments, which it operates in a
50-50 joint venture with ConocoPhillips. It also co-owns
refineries in Illinois and Texas with Phillips 66,
Conoco's recent spin-off.
    The partner hunt for Telephone Lake was never about just
looking for cash to help to foot the bill, chief executive Brian
Ferguson said. Instead, Cenovus wanted a player that offered
ways to deal with the often-deep price discount on extra-heavy
bitumen versus benchmark light oil, such as refining capacity.
    "We did receive several expressions of interest, bids, but
overall when we look at the combination of cash and what I would
describe as strategic advantage, there wasn't what I would view,
given the truly world-class nature of this asset, what I would
perceive to be compelling value," Ferguson said during a
conference call to discuss the second-quarter results.
    In addition, recent joint-venture deals in Canadian oil
sands and natural gas have shown prospective partners are
seeking short-term cash flow, which Telephone Lake would not
provide. Cenovus has yet to start the regulatory approval
process for the project and it is not currently in its 10-year
production plan. Construction could start in 2014.
    Its next big development is called Narrows Lake, and the
company expects to sanction the development later this year,
with first production of 35,000 barrels a day expected by 2017.
Eventual output is expected to be 130,000 bpd.
    In the second quarter, the company's profit was held back by
weaker oil and gas prices, which were only partly offset by
higher production and strong results in its refining segment.
    Cenovus shares fell 85 Canadian cents, or 2.7 percent, to
C$31.25 on the Toronto Stock Exchange.
    The market reaction was puzzling given neutral to slightly
positive overall results, TD Securities analyst Menno Hulshof
    Despite weaker earnings, the company is on track to meet its
annual cash flow forecast of C$900 million to C$1.2 billion
($883 million to $1.18 billion), Hulshof said in a note to
    In the quarter, net earnings fell to C$396 million, or 52
Canadian cents a share, from year-earlier C$655 million, or 86
Canadian cents a share.
    Operating earnings, which exclude most one-time and unusual
items, fell to C$283 million, or 37 Canadian cents, from C$395
million, or 52 Canadian cents a share. That lagged the average
analyst forecast for the measure of 52 Canadian cents, according
to Thomson Reuters I/B/E/S.
    Cenovus's cash flow, a key indicator of its ability to pay
for new projects, fell about 2 percent to C$925 million, or     
C$1.22 a share, from C$939 million, or C$1.24 per share, a year
    Total oil production rose 28 percent to 155,566 barrels a
day, and natural gas output fell 9 percent to 596 million cubic
feet a day. Production from the company's Christina Lake and
Foster Creek oil sands projects rose 38 percent to 80,317
barrels per day.
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