1. DESCRIPTION OF BUSINESS AND SEGMENTED DISCLOSURES

Cenovus Energy Inc. and its subsidiaries, (together “Cenovus” or the “Company”) are in the business of developing, producing and marketing crude oil, natural gas liquids (“NGLs”) and natural gas in Canada with marketing activities and refining operations in the United States (“U.S.”).

Cenovus is incorporated under the Canada Business Corporations Act and its shares are listed on the Toronto (“TSX”) and New York (“NYSE”) stock exchanges. The executive and registered office is located at 2600, 500 Centre Street S.E., Calgary, Alberta, Canada, T2G 1A6. Information on the Company’s basis of preparation for these interim Consolidated Financial Statements is found in Note 2.

Management has determined the operating segments based on information regularly reviewed for the purposes of decision making, allocating resources and assessing operational performance by Cenovus’s chief operating decision makers. The Company evaluates the financial performance of its operating segments primarily based on operating margin. The Company’s reportable segments are:

•

Oil Sands, which includes the development and production of bitumen and natural gas in northeast Alberta. Cenovus’s bitumen assets include Foster Creek, Christina Lake and Narrows Lake as well as other projects in the early stages of development. The Company’s interest in certain of its operated oil sands properties, notably Foster Creek, Christina Lake and Narrows Lake, increased from 50 percent to 100 percent on May 17, 2017.

•

Deep Basin, which includes approximately three million net acres of land primarily in the Elmworth‑Wapiti, Kaybob-Edson, and Clearwater operating areas, rich in natural gas and NGLs. The assets reside in Alberta and British Columbia and include interests in numerous natural gas processing facilities. These assets were acquired on May 17, 2017.

•

Refining and Marketing, which is responsible for transporting, selling and refining crude oil into petroleum and chemical products. Cenovus jointly owns two refineries in the U.S. with the operator Phillips 66, an unrelated U.S. public company. In addition, Cenovus owns and operates a crude-by-rail terminal in Alberta. This segment coordinates Cenovus’s marketing and transportation initiatives to optimize product mix, delivery points, transportation commitments and customer diversification. The marketing of crude oil and natural gas sourced from Canada, including physical product sales that settle in the U.S., is considered to be undertaken by a Canadian business. U.S. sourced crude oil and natural gas purchases and sales are attributed to the U.S.

•

Corporate and Eliminations, which primarily includes unrealized gains and losses recorded on derivative financial instruments, gains and losses on divestiture of assets, as well as other Cenovus-wide costs for general and administrative, financing activities and research costs. As financial instruments are settled, the realized gains and losses are recorded in the reportable segment to which the derivative instrument relates. Eliminations include adjustments for internal usage of natural gas production between segments, crude oil production used as feedstock by the Refining and Marketing segment, and unrealized intersegment profits in inventory. Eliminations are recorded at transfer prices based on current market prices. The Corporate and Eliminations segment is attributed to Canada, with the exception of unrealized risk management gains and losses, which have been attributed to the country in which the transacting entity resides.

In 2017, the Company announced its intention to divest of its Conventional segment that included its heavy oil assets at Pelican Lake, the CO₂ enhanced oil recovery project at Weyburn and conventional crude oil, NGLs and natural gas assets in the Suffield and Palliser areas in southern Alberta. As such, the associated results of operations have been reported as a discontinued operation (see Note 8). As at January 5, 2018, all of the Company’s Conventional assets were sold.

The following tabular financial information presents the segmented information first by segment, then by product and geographic location.

A) Results of Operations – Segment and Operational Information

	Oil Sands					Deep Basin						Refining and Marketing
For the three months ended June 30,	2018		2017			2018			2017			2018			2017
Revenues
Gross Sales		3,248		1,666			241			124			2,777			2,397
Less: Royalties		179		36			16			8			-		-
		3,069		1,630			225			116			2,777			2,397
Expenses
Purchased Product		-	-				-		-				2,224			2,183
Transportation and Blending		1,642		879			27			10			-		-
Operating		263		264			109			55			197			192
Production and Mineral Taxes		-	-				1		-				-		-
(Gain) Loss on Risk Management		688		(14	)		10		-				(1	)		2
Operating Margin		476		501			78			51			357			20
Depreciation, Depletion and Amortization		383		284			107			55			55			55
Exploration Expense		4	-				-		-				-		-
Segment Income (Loss)		89		217			(29	)		(4	)		302			(35	)

						Corporate and Eliminations						Consolidated
For the three months ended June 30,						2018			2017			2018			2017
Revenues
Gross Sales							(239	)		(106	)		6,027			4,081
Less: Royalties							-		-				195			44
							(239	)		(106	)		5,832			4,037
Expenses
Purchased Product							(200	)		(103	)		2,024			2,080
Transportation and Blending							(4	)		(2	)		1,665			887
Operating							(34	)		(2	)		535			509
Production and Mineral Taxes							-		-				1		-
(Gain) Loss on Risk Management							(122	)		(275	)		575			(287	)
Depreciation, Depletion and Amortization							14			14			559			408
Exploration Expense							-		-				4		-
Segment Income (Loss)							107			262			469			440
General and Administrative							109			58			109			58
Finance Costs							156			168			156			168
Interest Income							(3	)		(10	)		(3	)		(10	)
Foreign Exchange (Gain) Loss, Net							212			(410	)		212			(410	)
Revaluation (Gain)							-			(2,555	)		-			(2,555	)
Transaction Costs							-			26			-			26
Re-measurement of Contingent Payment							377			(66	)		377			(66	)
Research Costs							7			5			7			5
(Gain) Loss on Divestiture of Assets							(1	)		-			(1	)		-
Other (Income) Loss, Net							2			(2	)		2			(2	)
							859			(2,786	)		859			(2,786	)
Earnings (Loss) From Continuing Operations Before Income Tax													(390	)		3,226
Income Tax Expense (Recovery)													20			668
Net Earnings (Loss) From Continuing Operations													(410	)		2,558

	Oil Sands					Deep Basin						Refining and Marketing
For the six months ended June 30,	2018			2017		2018			2017			2018			2017
Revenues
Gross Sales		5,654			2,728		500			124			5,009			5,001
Less: Royalties		237			63		51			8			-		-
		5,417			2,665		449			116			5,009			5,001
Expenses
Purchased Product		-		-			-		-				4,181			4,513
Transportation and Blending		3,134			1,445		52			10			-		-
Operating		559			404		200			55			515			411
Production and Mineral Taxes		-		-			1		-				-		-
(Gain) Loss on Risk Management		1,142			63		19		-				4			4
Operating Margin		582			753		177			51			309			73
Depreciation, Depletion and Amortization		745			454		311			55			109			109
Exploration Expense		6		-			-		-				-		-
Segment Income (Loss)		(169	)		299		(134	)		(4	)		200			(36	)

						Corporate and Eliminations						Consolidated
For the six months ended June 30,						2018			2017			2018			2017
Revenues
Gross Sales							(433	)		(204	)		10,730			7,649
Less: Royalties							-		-				288			71
							(433	)		(204	)		10,442			7,578
Expenses
Purchased Product							(328	)		(199	)		3,853			4,314
Transportation and Blending							(7	)		(4	)		3,179			1,451
Operating							(97	)		(3	)		1,177			867
Production and Mineral Taxes							-		-				1		-
(Gain) Loss on Risk Management							(260	)		(554	)		905			(487	)
Depreciation, Depletion and Amortization							29			32			1,194			650
Exploration Expense							-		-				6		-
Segment Income (Loss)							230			524			127			783
General and Administrative							288			101			288			101
Finance Costs							306			267			306			267
Interest Income							(6	)		(27	)		(6	)		(27	)
Foreign Exchange (Gain) Loss, Net							489			(486	)		489			(486	)
Revaluation (Gain)							-			(2,555	)		-			(2,555	)
Transaction Costs							-			55			-			55
Re-measurement of Contingent Payment							494			(66	)		494			(66	)
Research Costs							19			9			19			9
(Gain) Loss on Divestiture of Assets							(1	)		1			(1	)		1
Other (Income) Loss, Net							-			(2	)		-			(2	)
							1,589			(2,703	)		1,589			(2,703	)
Earnings (Loss) From Continuing Operations Before Income Tax													(1,462	)		3,486
Income Tax Expense (Recovery)													(138	)		717
Net Earnings (Loss) From Continuing Operations													(1,324	)		2,769

B) Revenues by Product

	Three Months Ended					Six Months Ended
For the periods ended June 30,		2018		2017			2018		2017
Upstream
Crude Oil		3,104		1,639			5,483		2,667
Natural Gas		70		68			175		72
NGLs		100		32			174		32
Other		20		7			34		10
Refined Product		2,315		1,754			4,078		3,395
Market Optimization		462		643			931		1,606
Corporate and Eliminations		(239	)	(106	)		(433	)	(204	)
Revenues From Continuing Operations		5,832		4,037			10,442		7,578

C) Geographical Information

	Revenues
	Three Months Ended			Six Months Ended
For the periods ended June 30,		2018	2017		2018	2017
Canada		3,480	2,317		6,327	4,176
United States		2,352	1,720		4,115	3,402
Consolidated		5,832	4,037		10,442	7,578

	Non-Current Assets ⁽¹⁾
As at	June 30, 2018		December 31, 2017
Canada ⁽²⁾		31,381		31,756
United States		4,036		3,856
Consolidated		35,417		35,612

(1)	Includes exploration and evaluation (“E&E”) assets, property, plant and equipment (“PP&E”), goodwill and other assets.

(2)	Certain crude oil and natural gas properties of the Conventional and Deep Basin segments, which reside in Canada, were reclassified as held for sale in current assets.

D) Exploration and Evaluation Assets, Property, Plant and Equipment, Goodwill and Total Assets

	E&E Assets				PP&E
As at	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Oil Sands		623		617		22,112		22,320
Deep Basin		3,056		3,056		2,879		3,019
Refining and Marketing	-		-			4,147		3,967
Corporate and Eliminations	-		-			274		290
Consolidated		3,679		3,673		29,412		29,596

	Goodwill				Total Assets
As at	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Oil Sands		2,272		2,272		26,953		26,799
Deep Basin	-		-			6,552		6,694
Conventional	-		-			39		644
Refining and Marketing	-		-			5,708		5,432
Corporate and Eliminations	-		-			1,047		1,364
Consolidated		2,272		2,272		40,299		40,933

E) Capital Expenditures ⁽¹⁾

	Three Months Ended				Six Months Ended
For the periods ended June 30,		2018		2017		2018	2017
Capital Investment
Oil Sands		224		215		542	387
Deep Basin		26		13		171	13
Conventional		(2	)	50		-	138
Refining and Marketing		35		40		88	86
Corporate and Eliminations		9		9		15	16
		292		327		816	640
Acquisition Capital
Oil Sands ⁽²⁾		-		11,604		-	11,604
Deep Basin		2		6,627		7	6,627
Total Capital Expenditures		294		18,558		823	18,871

(1)	Includes expenditures on PP&E, E&E assets and assets held for sale.

(2)

In connection with the Acquisition discussed in Note 7, Cenovus was deemed to have disposed of its pre-existing interest in FCCL and re-acquired it at fair value as required by International Financial Reporting Standard 3, “Business Combinations” (“IFRS 3”), which is not reflected in the table above. The carrying value of the pre-existing interest was $9,081 million and the estimated fair value was $11,605 million as at May 17, 2017.